Jittery global financial markets saw signs of stabilisation on Thursday, with major equity bourses and bond yields holding their ground and the dollar wilting after the highest U.S. inflation reading in nearly 40 years.
The seven per cent year-on-year U.S. consumer price inflation reading was the highest since 1982, but after weeks of Federal Reserve officials talking about faster interest rate hikes and stimulus withdrawal it had been widely expected.
MSCI’s 50-country index of world stocks barely budged, little changed from where it started the year, while Europe recovered from an early dip to add to two days of solid gains even as the euro climbed to its highest in nearly two months.
Asian markets had weakened slightly overnight on softer-than-expected Chinese lending data and more falls in the property sector, but futures markets where pointing to a steady restart for Wall Street which had closed higher on Wednesday.
“As we see it, the inflation story is going to persist for good a while longer yet,” Manulife Asset Management’s global macro strategist Eric Theoret said.
“We have had a tremendous acceleration in the Fed’s tightening,” he added. Theoret pointed out that when the U.S. central bank raised interest rates in 2015 it waited two years before shrinking its balance sheet, whereas this time it could begin by the end of the year.
“The challenge from here is how the global economy responds to this normalisation.”
In the bond markets, where borrowing costs have raced to keep up with rate hike expectations this year, 10-year U.S. Treasury yields hovered around 1.74 per cent and Germany’s 10-year yield spent the day bobbing near -0.064 having approached positive yield territory for the first time since May 2019.
European Central Bank Vice President Luis de Guindos became the latest to warn that the current spike in inflation was not going to be as transitory as originally expected.
Upmarket Swiss bathroom goods giant Geberit (GEBN.S) had seen its shares slide too as it warned it was now impossible to predict how much raw materials prices would rise this year.
It is a busy period for bond issuance as countries and companies look to beat the rise in rates. Italy was due to sell up to 7 billion euros of three- and seven-year bonds later, Ireland was eyeing a bumper sale. The week is also set to be a record one for emerging market corporate debt sales with nearly 30 taking place.
“It is a record in my time,” said Omotunde Lawal, head of emerging markets corporate debt at Barings. “Most people are swamped, but you can see why with as many as four Fed hikes now priced in.”
In the currency markets, the dollar was continuing to slip towards a 2-month low against a basket of currencies.
The euro was a big beneficiary of the move and extended its rise to $1.1479, up 0.3 per cent on the day, while sterling and the yen also extended recent gains. -Reuters