Stocks rally, bonds tumble as China manufacturing rebounds, inflation
weighs
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[March 01, 2023] By
Nell Mackenzie
LONDON (Reuters) -World stocks rebounded on Wednesday after China's
manufacturing activity expanded at the fastest pace in more than a
decade, while stronger-than-expected inflation numbers across the euro
zone battered government bonds.
Inflation data from German regions, a day after February numbers showed
price pressures surged more than expected across France and Spain,
bolstered expectations that the European Central Bank will push interest
rates higher and previously thought.
Germany's 2-year government bond yield, highly sensitive to changes in
interest rate expectations, rose to its highest since October 2008 at
around 3.60%, and was last up 8 basis points (bps) on the day. Bond
yields rise as prices fall.
"The surprises in January inflation releases have challenged hopes for a
smooth return to target inflation," said Bruno Schneller, a managing
director at INVICO Asset Management.
Sticky inflation might compel central banks to raise rates further in
order to prevent further economic damage, he said.
"Consequently, the risk of policy-driven recessions could rise," he
added.
Two-year Treasury yields, a guide to short-term U.S. rate expectations,
were close to four-month highs, but at 4.82%, are below a November peak
around 4.88%.
The next flush of economic indicators is likely to be crucial as markets
assess whether future rate hikes are sufficiently priced in now.
CHINA'S FACTORIES ROAR
Meanwhile stock markets looked beyond Europe, cheered by numbers from
China's factory sector, which grew in February at the fastest pace in
more than a decade, in contrast to the rest of Asia where manufacturing
growth stalled.
China's official manufacturing purchasing managers' index (PMI) rose to
52.6 last month from 50.1 in January and was well ahead of an analyst
forecast for 50.5, giving investors hope that China's recovery can
offset a global slowdown.
MSCI's broadest index of Asia-Pacific shares outside Japan jumped 2.2%
earlier to leave behind a two-month low.
The index provider's broader world stock measure last rose 0.5%, with
Europe's STOXX 600 up 0.3% by 1159 GMT, kicking off the month on steady
ground following a solid start to the year.
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TV crews talk in front of a large screen
showing stock prices at the Tokyo Stock Exchange in Tokyo, Japan
October 2, 2020. REUTERS/Kim Kyung-Hoon
Over the past several years markets have become used to cheap money
and adapting to a new reality could be painful, said Russ Mould
investment director at AJ Bell.
"That is where the challenge lies," said Mould, adding he was
"scratching his head" about why stocks and bonds were spurred on by
different stories on Wednesday.
U.S. stocks were expected to reverse a downward week with S&P
futures up 0.3%.
In currency markets, the dollar's February gains seem to have run
out of steam and European and Asia Pacific currencies advanced on
the strength of the Chinese data.
The pound and euro were last up 0.2% and 0.9% against the dollar,
respectively.
Oil slipped on Wednesday, giving up an earlier gain, as signs of
ample supply and rising U.S. crude inventories countered
expectations for higher demand arising from a jump in manufacturing
in top crude importer China.
Brent crude futures were last down 0.6% at $82.91 a barrel.
Geopolitics also kept nerves elevated in the background.
Last week's U.S. President Joe Biden's visit to Kyiv and Russian
President Vladimir Putin's abandonment of the last remaining nuclear
arms control treaty with the U.S. signalled a hardening of
positions.
China, which showed support for Russia by sending its top diplomat
to Moscow last week, has issued a call for peace, though it has been
met with scepticism and Washington has expressed concern in recent
days that China could send arms to Russia.
"Should Beijing send Russia arms, it risks a rapid geopolitical
breaking of the world economy," said Rabobank's research head, Jan
Lambregts. "Markets have not even begun to contemplate what this
might mean."
(Reporting by Nell Mackenzie; Editing by Dhara Ranasinghe, Sharon
Singleton and Tomasz Janowski)
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