World stocks stand firm, British data sends pound lower

[September 12, 2023]  By Tom Westbrook and Alun John

SINGAPORE/LONDON (Reuters) - Global stocks held firm on Tuesday and the dollar regained a little of its overnight losses a day ahead of crucial U.S. inflation data that could influence when or whether the Federal Reserve raises rates further.

Traders still had plenty to watch on Tuesday ahead of the key U.S. numbers and Thursday's European Central Bank meeting, as Britain reported a rise in its unemployment rate that means the Bank of England's expected rate rise next week might be its last.

Europe's Stoxx 600 index edged up 0.27%, with Britain's FTSE an outperformer gaining 0.67%, helped at the margin by expectations that the jobs data will lead to a softer pound and in turn make British stocks more attractive to investors overseas.

Britain's labour market showed more signs of cooling in the three months through July, data showed on Tuesday, suggesting a weaker economy leading to slowing inflation, easing pressure on the Bank of England to raise rates much further.

"I think (the data) underscores the likelihood of just one more and then done for the Bank of England and more of a bull steepening in the gilt (British government bond) market while we have had bear flattening elsewhere where higher oil prices have dominated the narrative," said Chris Scicluna, head of research at Daiwa Capital Markets.

Bond yields move inversely to prices and bull steepening refers to shorter dated rates falling faster than longer dated rates.

The two-year gilt yield was down nearly 6 basis points to 5.02%, falling more sharply than the 10-year gilt yield which was at 4.42%.

The 10-year German bund yield, the regional benchmark, held steady at 2.62% after recent gains, while the U.S. 10-year yield was steady at 4.278%.

Sterling was last down 0.25% at $1.2477, while the euro dropped a similar amount to $1.0719, as the dollar resumed its rise across the board after a blip a day earlier on the back of moves in Asian currencies.

The yen on Monday notched its best day against the dollar in two months, after Bank of Japan Governor Kazuo Ueda said policymakers might have enough economic information by the year-end to determine that short-term rates will need to rise.

China's yuan also had its best day in six months on Monday, after authorities vowed to correct one-way moves and Reuters reported the central bank had stepped up scrutiny of dollar buying.

A huge electric stock quotation board is seen inside a building in Tokyo, Japan, December 30, 2022. REUTERS/Issei Kato

Both, however, remain near their weakest levels of the year.

Also in Asia, investors in China drew some comfort from news that the country's largest private property developer Country Garden has won approval from creditors to extend repayments on six onshore bonds by three years.

That lifted Hong Kong-listed Chinese developers, though MSCI's broadest index of Asia Pacific shares outside Japan was down 0.15%.

FED AND ECB

The week's two big macroeconomic events, U.S. CPI and the European Central Bank meeting are still to come however.

Markets are expecting the U.S. figures, due on Wednesday, to show annualised core inflation falling to 4.3% in August though the headline number is seen ticking up to 3.6%.

"A lower-than-expected print may slow the U.S. dollar's rise while (a) higher print could potentially un-nerve risk sentiments as it would reinforce market expectations for further rate hikes, and this could fuel dollar strength," said OCBC strategist Christopher Wong.

Interest-rate futures markets are pricing about a 45% chance of another U.S. rate hike by year's end.

Investors' appetite for risk is also to be tested this week when British chip designer Arm Holdings lists in New York with a goal of raising almost $5 billion.

The European Central Bank meanwhile meets on Thursday. Markets think it is more likely the central bank will keep rates steady, than hike by 25 basis points, though the latter remains firmly on the table.

In commodity markets, Brent crude futures were up 0.45% at $91.05 a barrel. Gold hung on at $1,920 an ounce.

(Editing by Lincoln Feast, Simon Cameron-Moore and Susan Fenton)

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