LDN - Business

Stocks shrug off rate risks as data tempers recession worries

[February 16, 2023] By Tom Westbrook

(Reuters) - Stocks rose on Thursday as economic data from around the world fed hopes that the global economy might not face as hard a landing as feared a few months ago, even as interest rates threaten to remain higher for longer than expected.

The pan-European STOXX 600 index rose 0.5%, while London's FTSE 100 continued with its recent run of record highs thanks to with a flurry of share buybacks from banks lifting their stocks.

France's CAC 40 advanced 0.8%, leaving it a whisker away from record highs.

MSCI's all country world price index rose 0.3%, on track to recover last week's losses and up more than 1% this week. U.S. stock futures were marginally higher.

Data showing U.S. retail sales increased the most in nearly two years in January, as well as cooler inflation and stronger consumer spending in the United States, the euro zone and the UK, gave investors more confidence in the economic outlook.

"What is becoming clearer with this particular set of data, is that the U.S. economy in particular has been very resilient and so as a result, the market is sort of pricing out this risk of a hard landing at least in the short-term," said Julien Lafargue, chief market strategist at Barclays Private Bank.

"People are feeling a bit better about getting invested. It is positioning that is driving the market, because if you have people who are positioned more for recession and the data, as well as the market reaction to this data, is telling you well, it's not going to be as bad as you think, that forces people into the market."

The mood nudged the greenback below six-week highs against the yen, yuan and kiwi, although losses were contained as the outlook for interest rates still carries more weight.

Benchmark 10-year Treasury yields, which rise when bond prices fall, hit their highest since early January, but retreated to show a 3-basis point decline on the day to 3.78%.

Equities - with the Nasdaq up 15% so far this year - are clinging to the positives, while in interest rate markets investors are quickly ditching hopes for cuts later in 2023.

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The German share price index DAX graph is pictured at the stock exchange in Frankfurt, Germany, February 14, 2023. REUTERS/Staff

Only a couple of weeks ago, U.S. interest rate futures implied the Fed funds rate, currently fixed between 4.5% and 4.75%, would drop below 4.5% by year's end. They now flag rates above 5% through the year.

Two-year Treasury yields, which also track short-term interest rate expectations, hit their highest since November at 4.703% overnight.

Central bankers are out in force later, with European Central Bank board member Fabio Panetta, Bank of England chief economist Huw Pill, Bank of Canada Governor Tiff Macklem and Fed officials James Bullard and Loretta Mester among the speakers.

DOLLAR ASCENDANT

While equities keep climbing, the repricing of the interest rate outlook is nevertheless putting the brakes on a couple months of selling of the dollar.

The U.S. dollar index, which was roughly flat on the day at 103.78, is eyeing a third weekly gain in a row - the longest streak since September, when the index was galloping towards a 20-year high.

The dollar made a six-week high of 134.36 yen on Wednesday and hovered at 133.87 on Thursday. It eased a little bit on the euro to $1.0699.

Commodities struggled for traction as the dollar gained. Brent crude futures rose 0.3% to $85.13 a barrel. Gold, which pays no income and has been dragged down by rising Treasury yields, stabilised at $1,835.69 an ounce.

Bitcoin, meanwhile, has been on a tear. It hit a six-month high of $24,646, partly boosted by news of big investors taking stakes in crypto bank Silvergate.

(Reporting by Tom Westbrook and Susan Mathew; Editing by Bradley Perrett, Sam Holmes and Kim Coghill)

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