- European shares up 0.45%, U.S. S&P futures flat
- U.S. yield curve most inverted since 1981
- Brent hits 4-week low
LONDON/SYDNEY, Nov 18 (Reuters) – Global stocks were set to drop 1% this week on Friday, retreating from a recent two-month high, after more warnings from Fed officials on interest rates, while U.S. bond yields Curves pricing recessions.
The dollar and bond yields rose after St. Louis Fed President James Bullard said rates would likely need to rise to a range of 5-5.25% from just below 4.00% now to be “sufficiently constrained” to curb inflation.
That was a blow to investors, who had been betting that rates would peak at 5% and saw fed funds futures sell off as the market now sees rates at 5-5.25% as more likely than 4.75- 5.0%.
“The Fed countered what the market was saying with their speech – we’re not going to see a turn,” said Arun Sai, senior multi-asset strategist at Pictet Asset Management.
Sai said markets are now “in full swing” and will turn their attention to the real economy’s response to rising interest rates, such as anecdotal signs of a slowdown in the U.S. labor market.
The MSCI index of world shares (.MIWD00000PUS) inched up 0.17%, while U.S. S&P futures were steady after the S&P 500 (.SPX) fell 0.3% on Thursday.
European shares (.STOXX) rose 0.54% and banks (.SX7P) rose nearly 1% as the European Central Bank prepares to begin the largest withdrawal of cash in its history from the euro zone banking system.
Banks are expected to repay around €500 billion in Targeted Long-Term Refinancing Operation (TLTRO) loans. The ECB is expected to issue a statement at 1105GMT.
Britain’s FTSE rose 0.33%, a day after Finance Minister Jeremy Hunt announced tax hikes and spending cuts to reassure markets that the government is serious about fighting inflation.
British retail sales rebounded only partially last month after being shut down for Queen Elizabeth’s funeral in September, and remained below pre-pandemic levels as soaring inflation hit spending power, data on Friday showed.
Dean Turner, chief euro area and UK economist at UBS Global Wealth Management, said: “While the BoE is likely to keep raising rates despite the slowdown, the peak is likely to be lower than in the US.”
US two-year yields rose back to 4.48%, retracing slightly last week’s sharp 33 basis point drop to a low of 4.29% driven by inflation.
That puts them 69 basis points above the 10-year Treasury yield, the largest inversion since 1981 and an indicator of an impending recession.
Against a basket of currencies, the dollar was flat at 106.65, having touched a three-month low of 105.30 earlier this week.
The dollar was steady at 140.23 yen, but remained above recent lows of 137.67. Sterling rose 0.3 percent to $1.1904.
The euro held at $1.0357, retreating from a four-month high of $1.0481 touched on Tuesday, as some policymakers advocated a cautious approach to tightening policy.
ECB President Christine Lagarde, who will give a keynote speech later on Friday, may offer guidance on which way most at the bank might lean.
MSCI’s broadest index of Asia-Pacific shares outside Japan (.MIAPJ0000PUS) was steady.
Chinese blue chips ( .CSI300 ) fell 0.45% after reports that Beijing had asked banks to check liquidity in the bond market after reports that some investors had suffered losses as yields soared.
There are also concerns that a surge in COVID-19 cases in China will challenge plans to ease strict movement restrictions that have restricted the economy.
Japan’s Nikkei (.N225) fell 0.1 percent after data showed inflation was at a 40-year high as a weaker yen pushed up import costs.
Still, the BOJ has argued that inflation is largely driven by energy costs beyond its control and that the economy needs continued ultra-loose policy.
Brent crude hit a four-week low amid concerns over weak Chinese demand and further rate hikes by the Federal Reserve.
Brent crude hit a low of $89.51 a barrel, down 0.2%. U.S. crude was steady at $81.67 a barrel.
Gold prices rose 0.1 percent to $1,763 an ounce after hitting a three-month high of $1,786 earlier this week.
Edited by Bradley Perrett, Sam Holmes and Simon Cameron-Moore
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