LDN - Business

Fed inflation talk supports stocks, NZ dollar gains

[May 26, 2021] By Carolyn Cohn

LONDON (Reuters) - Futures were indicating a stronger Wall Street open on Wednesday and European stocks were steady near recent record highs after U.S. Federal Reserve officials soothed inflation worries, though New Zealand's currency rose on rate hike expectations.

Richard Clarida, the Fed's vice chair, said on Tuesday that the U.S. central bank would be able to curb an outbreak of inflation and engineer a "soft landing" without throwing the country's economic recovery off track.

"Inflation is the key focus of our clients, companies are complaining about supply chain bottlenecks, employment shortages in the U.S.," said Eddie Cheng, head of international multi-asset portfolio management at Wells Fargo Asset Management

But he added: "Our base case is the Fed is thinking this is transitory."

S&P 500 e-minis were up 0.29%, within sight of recent record highs after the index closed down 0.21%. World stocks were little changed.

European stocks were flat below a record peak set on Tuesday. Germany's DAX dipped 0.1% and Britain's FTSE 100 lost 0.22%.

All the same, Clarida's comments reflect a shifting tone at the Fed. A month ago, Fed Chair Jerome Powell said it was "not yet" time to even contemplate discussion of policy tapering - or slowing the pace of its asset purchases - but more recently policymakers have acknowledged they are closer to debating when to pull back some of their crisis support for the U.S. economy.

The S&P 500 will end the year only about 2.5% above its current level, with concerns over increasing inflationary risks likely to temper some of the enthusiasm for U.S. stocks this year, according to a Reuters poll of strategists.

And in New Zealand, the central bank held interest rates at a record low on Wednesday but hinted at a hike as early as September next year. The prospect of higher rates sent the New Zealand dollar soaring more than 1% to a three-month high.

The dollar index was flat after touching its lowest level since Jan. 7 on Tuesday. The U.S. currency was also steady against the yen at 108.85. The euro dipped 0.1% to $1.2236, but remained near the previous session's 4-1/2 month highs.

Analysts are becoming more upbeat about the euro zone.

"Our baseline forecast sees a strong rebound in euro zone economic activity as vaccinations bring the pandemic under control," Oxford Economics analysts said in a note.

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Investors sit in front of a board showing stock information at a brokerage house on the first day of trade in China since the Lunar New Year, in Hangzhou, Zhejiang province, China February 3, 2020. China Daily via REUTERS

The benchmark 10-year U.S. Treasury yield was steady at 1.5638% after falling to multi-week lows in the previous session on easing inflation concerns.

The 10-year German bond yield, the euro zone's benchmark, dipped nearly 4 basis points to -0.201% following recent dovish commentary from the European Central Bank.

ECB board member Fabio Panetta on Wednesday said the ECB should not reduce the pace of asset purchases as the economic recovery is in an early phase and inflation remains too low.

Such comments "lower the probability that we will get a mini tapering announcement from the ECB at the June meeting", said Mohammed Kazmi, portfolio manager and macro strategist for fixed income at UBP.

Bitcoin climbed briefly back above $40,000, though the volatile cryptocurrency is down 30% this month.

MSCI's broadest index of Asia-Pacific shares outside Japan rose 0.45% to over two-week highs, while Tokyo's Nikkei advanced 0.3%.

Chinese blue-chips were steady after posting their biggest daily gain in nearly 11 months on Tuesday on easing inflation fears and a strong yuan.

On Wednesday, China's onshore and offshore yuan strengthened to near three-year highs against the dollar, with the onshore currency breaking through a key level that had prompted state banks to step in a day earlier.

Oil traded in a narrow range, supported by optimism about improving U.S. fuel demand and a weak dollar but with the prospect of returning Iranian oil keeping any gains in check.

Global benchmark Brent crude was up little changed at $68.62 and U.S. crude slipped 0.2% to $65.94 per barrel.

Spot gold added 0.34% to $1,905 an ounce.

(Reporting by Carolyn Cohn; Editing by Toby Chopra and Alex Richardson)

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