January 31, 2023

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Global stocks fell after the Fed’s inflation alert

LONDON (Reuters) – Global stocks fell for the first time in three days on Tuesday, after comments from two Federal Reserve officials injected caution about the outlook for US interest rates, sending a ripple effect on risky stocks, commodities and other assets.

MSCI All-World Index (.MIWD00000PUS) It fell 0.2%, but remained within sight of Monday’s three-week high, while the dollar — a measure of investors’ risk appetite — rose against a basket of major currencies.

In the past six weeks, China’s policy of not spreading the coronavirus even as the number of cases soared across the country has bumped markets as investors weigh the economic benefits of reopening against the impact of a wave of infections on activity.

Adding to this, there was a sense of optimism that inflation had peaked, especially in the US, and as such, the Federal Reserve would not have to raise interest rates as many had feared.

However, with consumer price pressures still well above the central bank’s 2% target, two Federal Reserve officials on Monday issued a stark reminder that interest rates must continue to rise, no matter what investors price.

“The market is trying to be one step ahead of the Fed, but it’s actually not listening to what it has to say. And the Fed is quite clear in its message – that prices will go higher and they will stay higher,” said Fiona Cincotta, CityIndex strategist.

“If we look at the inflation outlook later this week – big focus – core inflation is still expected to remain elevated. It doesn’t matter which way you look at it. It’s still above the Fed target,” she said.

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US consumer price data, released on Thursday, is expected to show headline inflation slowing to 6.5% in December from 7.1% in November.

The data could be key to setting expectations for what will happen with interest rates at the next Fed policy meeting and beyond.

San Francisco Fed President Mary Daly told the Wall Street Journal that she would pay close attention to Thursday’s data, and increases of 25 and 50 basis points were her options. Atlanta Federal Reserve Chairman Rafael Bostick said his “core issue” is not to cut interest rates this year or next.

“The main theme overnight was caution in the stock space as stocks pared gains after hawkish comments from two Fed officials. The Fed is likely to raise interest rates (interest) above 5% and hold hawkish comments from two Fed officials. out for some time,” Commerzbank said in a note.

Federal Reserve Chairman Jerome Powell will deliver a speech at a conference on central bank independence later on Tuesday and investors are likely to look at his remarks for any clue on monetary policy.

“Given the recent recovery in equity markets, the decline in bond yields and the US dollar easing financial conditions, today may provide an opportunity for Federal Reserve Chairman Jay Powell to reset the narrative a bit,” said Michael Hewson, chief strategist at CMC Markets.

Fragile China

In Europe, STOXX 600 (.STOXX)Which on Monday hit an eight-month high, fell 0.7%, led by a decline in the industrial sectors. FTSE 100 index in London (.FTSE) It lost 0.2%, while the DAX index lost in Frankfurt (.GDAXI) decreased 0.5%.

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US stock index futures fell 0.3%, indicating that Wall Street may open lower after a volatile session the previous day.

The dollar made gains against the Australian dollar, which is highly sensitive to the Chinese economy and has gained 3.5% in the past three weeks alone, based on optimism about reopening.

The Australian dollar last fell 0.5% to $0.6877, while the offshore yuan lost 0.1% against the dollar, to trade around 6.7913. It reached its strongest level since mid-August the day before.

The dollar index rose 0.2 percent. The euro stabilized, while the pound fell 0.3%. The yen was down 0.1% against the dollar, at 132.06, even after data showed a faster recovery in inflation in Tokyo, which could prompt the Bank of Japan to tighten monetary policy faster.

Strategists at BlackRock, the world’s largest asset manager, said on Tuesday they expect China’s economy to grow 6% this year, which should cushion the global slowdown as recession hits developed market economies. But any rebound may be fleeting.

“We don’t expect the level of economic activity in China to return to its pre-COVID trend, even as domestic activity resumes. We see growth taper off once the restart is running its course,” Wei Li, chief global investment strategist for BlackRock Investment Institute, said in a note.

Copper retreated from six-month highs as the upside from China’s exit from COVID-19 was met by concerns about the risks of a broader global recession.

Copper futures on the London Metal Exchange fell 0.5% to $8,813 a ton, after hitting their highest level in more than six months on Monday, while zinc fell 0.7%, and lead fell 2%.

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Oil pared earlier losses, but concern persisted that China’s return to normal activity may not translate into a boom in energy demand.

“The social vitality of major Chinese cities is recovering rapidly, and the resumption of Chinese demand is worth looking forward to. However, given that the recovery in consumption is still in the expected stage, the oil price is likely to remain low and range-bound,” analysts from Haitong Futures said.

Brent crude futures rose in the latest transactions, 0.4 percent, to $ 80.00 a barrel. The price of oil is about 2.3% lower than it was a year ago and 45% below its highs of $139 after Russia invaded Ukraine last February.

Additional reporting by Selina Lee in Hong Kong. Editing by Muralikumar Anantharaman, Angus McSwan and Chizu Nomiyama

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