Stock, bonds stung by hawkish central banks
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[December 16, 2022] By
Dhara Ranasinghe and Naomi Rovnick
LONDON (Reuters) - World stocks were stuck near one-month lows and
government bond markets came under fresh selling pressure on Friday, a
day after a slew of central banks jacked up interest rates and signalled
that the fight to tame inflation was not over yet.
Interest rates went up in the euro area, Britain, Switzerland, Denmark,
Norway, Mexico and Taiwan on Thursday, following a U.S. rate hike a day
before, and central bankers vowed to keep raising rates to bring down
prices.
This week's hawkish message from the likes of the European Central Bank
and the Federal Reserve brought an abrupt end to optimism that peak
interest rates are on the horizon.
Europe's Stoxx 600 share index fell 1.1% and futures trade tipped Wall
Street's benchmark S&P 500 index to open 1.4% lower later in the day.
Major U.S. indices on Thursday suffered their biggest daily percentage
drop in weeks.
World stocks were also under pressure after S&P Global's flash
purchasing managers index showed eurozone economic activity contracted
for the sixth consecutive month in December, although the deceleration
also eased to its slowest pace in four months.
In Asia, Japan's Nikkei index closed at its lowest in more than a month
and MSCI's broadest index of Asia-Pacific shares outside Japan was set
for its worst week in two months.
All this left MSCI's world stock index down 0.3% on Friday, and
languishing near its lowest level in almost a month.
"Central banks delivered a blow to markets that were rebounding in
anticipation of policymakers turning dovish on inflation and interest
rates," said Sunil Krishnan, head of multi-asset at Aviva Investors.
The ECB delivered a 50-bps hike like the Fed. Both opted for a smaller
increase this time, but flagged there were more increases to come.
Its hawkish message triggered a second day of heavy selling across
European bond markets where yields on benchmark German 10-year bonds
jumped as much as 14 bps.
The yield on Germany's rate-sensitive two-year bond yield rose as high
as 2.5% on Friday,, its highest level since 2008.
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A man on a bicycle stands in front of an
electronic board showing Shanghai stock index, Nikkei share price
index and Dow Jones Industrial Average outside a brokerage in Tokyo,
Japan September 22, 2022. REUTERS/Kim Kyung-Hoon
The closely-watched gap between Italian and German bond yields
widened to 218 bps, while Germany's yield curve pushed deeper into
inverted territory in a sign that investors were positioning for a
sharp growth slowdown.
British bond yields also jumped and U.S. Treasury yields edged
higher in London trade.
"We now expect the ECB to go to 3.25% (including 50 bps in March)
and the Fed to 5.25% which argues for persistent pressure on yields
and spreads," said Christoph Rieger, head of rates and credit
research at Commerzbank.
GROWTH WORRIES
In China, where markets are churning around an uncertain reopening,
relief at the apparent resolution of a long-running accounting
access dispute with the United States was not enough to bolster
sentiment.
Meanwhile, Japan's manufacturing activity shrank at the fastest pace
in more than two years in December, while U.S. retail sales fell
more than expected in November.
The prospect of further monetary tightening globally kept investors
nervous about longer-run growth.
In currency markets, the dollar steadied after strong gains in the
previous session.
The dollar index, which gauges the currency against six major peers,
was roughly unchanged at 104.51. That followed a 0.85% surge
overnight, its biggest since late September.
The euro was flat at $1.0626, while the dollar was 0.5% weaker at
137 yen.
Gold ticked 0.4 % higher to $1,784 an ounce. Oil gave up recent
gains with Brent crude futures down 2.2% at $79.41 a barrel.
(Reporting by Dhara Ranasinghe; additional reporting by Naomi
Rovnick in London and Tom Westbrook in Singapore; Editing by Arun
Koyyur and Raissa Kasolowsky)
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