LDN - Business

Fed rates up, stocks up, BoE and ECB up next

[February 02, 2023] By Marc Jones

LONDON (Reuters) - The bulls were in charge ahead of the European Central Bank and Bank of England's first meetings of the year on Thursday, after the U.S. Federal Reserve bolstered the view that the surge in global interest rates was close to an end.

Fed chair Jerome Powell's message that a "disinflationary" process was taking hold had sent Wall Street up, the dollar down and kept Europe's stocks 0.5% higher as the BoE and ECB loomed.

Both are expected raise their mains rates by 50 basis points, but as with the Fed, the focus will be on what do they do from here.

The usual pre-meeting lull left the euro up just 0.1% and the pound looking groggy, though the gap between U.S. and German 10-year yields hit its smallest since September 2020 as bond market borrowing costs continued to sink. [GVD/EUR]

Dirk Schumacher, head of European macro research at Natixis, said that both the Fed and BoE were now effectively at the point of "fine tuning", whereas the ECB still had more ground to cover having started its hikes later.

"The questions is really how much there is to come," Schumacher said. "These are difficult waters and some guidance is what the markets are looking for."

Away from the central bank action, there was more drama in India as one of its biggest firms, Adani, was forced the axe a long-planned $2.5 billion stock offer in the wake of allegations, denied by the firm, of hidden debt and stock manipulation.

The group's flagship firm - Adani Enterprises plunged 10%, taking the wider group's overall losses since the scandal erupted to more than $100 billion.

Elsewhere, though, it didn't derail the optimism that slowing, stopping and eventually lower interest rates in major economies will avoid a major economic slowdown.

MSCI's broadest index of global shares which covers 47 countries was up 0.25 having just hit a near six-month high.

Wall Street's overnight rally was given an additional boost by a $40 billion Meta share buyback plan which lifted tech stocks elsewhere, and Asia-Pacific shares closed up 0.2%.

That index is now up nearly 30% since October thanks to China abandoning many of its COVID-19 restrictions.

BOE, ECB & EARNINGS

The Fed's 25 basis points interest rate increase on Wednesday came after a year of larger hikes. Though its statement said policymakers expected "ongoing increases" going forward traders leapt on Powell's "disinflationary" view. [.N]

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Visitors walk past Japan's Nikkei stock prices quotation board inside a conference hall in Tokyo, Japan September 14, 2022. REUTERS/Issei Kato/Files

Ali Hassan, portfolio manager and managing director at Thornburg Investment Management, said Powell had also seemingly shrugged off easing financial conditions as a concern in his news conference. "This was a greenlight that the market could buy without feeling that they are fighting the Fed."

Europe's focus is now on ECB and BoE meetings and the paths those two central banks are likely to take.

Saxo Markets strategists said the ECB had surpassed its peers in hawkishness recently, and would likely repeat that this week. The BoE will be the trickiest to predict given indecisive market pricing and the scope for a split vote, they said.

U.S. earnings season is in full swing too.

Facebook owner Meta was set for surge after its after-hours buyback news. Nasdaq futures were up 1% with earnings from tech and internet giants Apple and Amazon also due later.

In the currency market, the dollar spiked lower following Powell's remarks, with the U.S. dollar index, which measures the currency against six major peers, falling to a fresh nine-month low of 100.80. It was last at 101.50.

The euro was up fractionally at just under $1.10. The yen stalled at 128.97 per dollar, while sterling was down at $1.2337, 0.3% lower for the morning.

In commodities, oil steadied, having climbed on the back the soft dollar, while gold added 0.2% to $1,953.44 an ounce, having touched a nine-month high of $1,957 per ounce earlier.

Brent was at $82.85, flat on the day, while West Texas Intermediate (WTI) U.S. crude sat at $76.44 per barrel. [O/R]

(Additional reporting by Ankur Banerjee in Singapre; Editing by Mark Potter)

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