World stocks nudge up, bonds rally in bright end to grim quarter

[September 29, 2023]  By Naomi Rovnick and Dhara Ranasinghe

LONDON (Reuters) - World shares nudged higher on Friday, while better-than-expected euro zone inflation data boosted government bonds, with both asset classes still set for their worst quarter in a year in response to central banks' pledge to keep interest rates high.

MSCI's broad index of global stocks gained 0.4% on Friday, while European and U.S. government bonds rallied strongly to reflect markets resetting interest rate bets.

In a surprise bout of good news for hawkish central banks, data showed headline inflation in the euro area rose 4.3% in September year-on-year, below economists' forecasts for a 4.5% rise and its lowest in two years.

The yield on Germany's two-year bond, which tracks rate expectations and falls as the price of the debt rises, dropped 7 basis points (bps) to 3.23%.

Germany's 10-year government bond yield fell 12 bps to 2.848%, with the euro area debt benchmark heading for its best trading day in more than a month.

And with strong sentiment flowing across the Atlantic, the yield on the 10-year U.S. Treasury fell 6 bps to 4.6%.

 That provided a bright end to a torrid quarter for government bonds. Germany's 10-year yield has shot up 45 bps this quarter, reflecting the worst three-month sell-off since the third quarter of 2022.

The yield on the 10-year U.S. Treasury is up 72 bps since July, also its worst quarterly performance since the same quarter last year.

The debt market relief came as some analysts argued bonds had become too beaten up in recent months.

The European Central Bank and the U.S. Federal Reserve have signaled that the best investors could hope for, following their sharpest monetary tightening cycle in decades, was a long period of interest rates staying where they are.

"Yields are way too high and will move lower but we're in that gap between now and when that happens," said James Rossiter, head of global macro strategy at TD Securities in London.

Strategists at Barclays pointed out in a note to clients, however, that because stock valuations fall when the income yields on lower-risk bonds rise, "if the bond market were to turn more disorderly, equities are unlikely to be immune."

A passerby walks past an electric monitor displaying various countries' stock price index outside a bank in Tokyo, Japan, March 22, 2023. REUTERS/Issei Kato/File photo

Elsewhere in markets, Europe's Stoxx 600 share index jumped 1% and Britain's FTSE 100 rose 0.8%.

Futures contracts that track the performance of Wall Street's S&P 500 share index indicated the blue-chip equity benchmark would open 0.5% higher later on.

In currencies, the euro added 0.5% against the dollar.

Sterling rose 0.4% after a revision of official data on Friday showed Britain's economic performance since the start of the COVID-19 pandemic was stronger than previously thought.

Later on Friday, the latest release of the U.S. personal consumption expenditures price index will provide a fuller picture of inflationary trends in the world's largest economy.

Investors will also turn their attention to Washington, where the Democratic-led U.S. Senate forged ahead on Thursday with a bipartisan stopgap funding bill aimed at averting a fourth partial government shutdown in a decade.

"People are getting used to partial shutdowns but if it is prolonged and the stakes are raised then the economic consequences start to mount," said Nordea chief markets strategist Jan von Gerich, adding that the dollar could be hurt if no agreement is reached.

The dollar index eased 0.5% to 105.69 but hovered near 10-month highs of 106.84 touched earlier this week.

In Asia, the Japanese yen was at 149.08 per dollar, a slight respite from recent falls that have put markets on alert for potential currency intervention.

MSCI's index of Asian stocks outside Japan rose 1.2% on Friday, with Chinese markets closed for a holiday.

Oil prices regained ground after a brief pause in a rally as traders weighed expectations of supply increases by Russia and Saudi Arabia versus forecasts of positive demand from China during its Golden Week holiday.

U.S. crude rose 0.5% to $92.16 per barrel and Brent was at $95.75, up 0.4% on the day. [O/R]

(Reporting by Naomi Rovnick and Dhara Ranasinghe in London and Ankur Banerjee in Singapore; Editing by Alexander Smith and Anil D'Silva)

[© 2023 Thomson Reuters. All rights reserved.]
This material may not be published, broadcast, rewritten or redistributed.  Thompson Reuters is solely responsible for this content.