LDN - Business

Stocks, bonds in euphoric mood, but dollar takes a beating

[November 17, 2023] By Dhara Ranasinghe

LONDON (Reuters) -World stocks held near two-month peaks on Friday, while oil prices were set for a fourth week of declines in a boost for the inflation outlook and government bond markets that are increasingly confident interest rate cuts are coming next year.

The dollar slid 1% against the yen and was set for one of its steepest weekly falls against other major currencies this year as market rate expectations shift.

MSCI's World Stock Index edged back up towards highs hit earlier this week, while European shares rallied 1% and U.S. stock futures pointed to a positive open for Wall Street later .

Oil prices attempted to bounce back after sliding almost 5% on Thursday to four-month lows in a move that was blamed on economic and supply concerns, though technical selling likely played a part when the $80 bulwark broke. [O/R]

Brent was last up 1% at $78.23 a barrel, but still down almost 20% from the $97.69 top hit in late September. U.S. crude also rallied 1% to $73.7.

Whatever the cause, the recent rout should put added downward pressure on global inflation and reinforce expectations of policy easing next year.

A softer tone to U.S. economic data this week has fuelled rate-cuts bets, pushing Treasury yields down and lifting equity markets.

November so far has seen one of the strongest performances for stock markets this year, with MSCI's world stock index and the S&P 500 index both more than 7% higher.

"We're still in this environment where we are late cycle and flirting with the idea of whether we go into a recession or not," said Justin Onuekwusi, chief investment officer at investment firm St James's Place.

"This is the key reason why central bank expectations have become a key driver to risk and right now it's hard to look beyond near-term."

BOND BULLS OUT

Global bond markets were in a bullish mood.

A fall in U.S. Treasury yields gathered momentum, with the 10-year yield falling to its lowest level since September at around 4.38% - a sharp drop from the 5.02% high hit just last month.

Two-year Treasuries yields are down 25 basis points for the week at 4.81%. That means they are set for their best weekly performance since March, when a banking crisis gripped world markets.

Rate-sensitive two-year bond yields in Germany and Britain fell to their lowest levels since June with money markets now pricing in roughly 100 basis points worth of rate cuts in the United States and the euro area.

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Pedestrians walk past an electronic board displaying Nikkei share average, outside a brokerage in Tokyo, Japan, October 31, 2023. REUTERS/Kim Kyung-Hoon/File Photo

Corporate bond spreads have also tightened sharply this week in another sign that risk appetite has picked up.

"The most striking number this week was the (U.S.) CPI, which was a bit lower than consensus and led to some euphoria in bond markets," said Christian Hantel, a portfolio manager at Vontobel Fixed Income Boutique.

"That tells you two things. One that in terms of inflation, we continue to move in the right direction and second, that there had been some doubts in markets on the topic of a soft landing so as more data confirmed that view, there was a strong move."

Data on Tuesday showed U.S. consumer prices were unchanged in October, and the annual rise in underlying inflation was the smallest in two years.

Adding to the disinflationary theme was commentary from Walmart executives that costs were "more in check" and they were planning on cutting prices for the holiday season.

DOLLAR BEATING

In FX markets, the sea change in market pricing for the Fed weighed on the dollar, with the U.S. currency down 1% below 150 yen.

The euro was a fifth of a percent firmer at $1.0872 and sterling reversed earlier falls to stand a touch firmer at $1.2433.

In Asia, shares outside Japan eased 0.45%, while Japan's Nikkei closed up 0.48%, to be around 3% firmer for the week, helped by reassurance from the Bank of Japan that it was sticking with its super loose policy.

Chinese blue chips were 0.12% lower, having missed on the general rally so far this week. Alibaba Group's Hong Kong shares slumped 10% after it scrapped plans to spin off its cloud business.

Sentiment in Asia had been supported by the apparent easing of tensions between the United States and China, with the Chinese press lauding the meeting between President Xi Jinping and President Joe Biden.

Gold nudged up to $1,989 an ounce, about 0.45% firmer. [GOL/]

(Reporting by Dhara Ranasinghe in London and Wayne Cole in Sydney; editing by Jane Merriman and Andrew Heavens)

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