LDN - Business

Shares steady but bonds hit by Fed disappointment

[April 17, 2024] By Tom Wilson and Stella Qiu

LONDON/SYDNEY (Reuters) -World shares steadied on Wednesday though investors stayed cautious at the prospect of U.S. interest rates staying higher for longer, which in turn pushed Treasury yields to five-month highs and buoyed the dollar.

European shares eked out gains of 0.2%, after notching their worst day in nine months a day earlier on concerns over geopolitical tensions in the Middle East.

U.S. Federal Reserve Chair Jerome Powell said on Tuesday that recent inflation data, with three months of upside surprises, had not given policymakers enough confidence to ease policy soon. The central bank may need to keep rates higher for longer than previously thought.

Markets have already slashed bets on the number of U.S. rate cuts this year to fewer than two, a sea change from about six cuts predicted at the beginning of the year. The first rate cut is still expected in September, although the market's confidence in that has declined.

Tensions between Iran and Israel also kept a cap on riskier bets, said Alexandre Marquis, senior portfolio manager at asset manager Unigestion, who said markets had already priced in the prospect of fewer rate cuts than previously hoped.

"Part of the disappointment was already in the price, with the recent correction we have seen in the last few days," he said.

The MSCI world equity index, which tracks shares in 47 countries, was flat. U.S. stock futures, meanwhile, slipped a smidgeon, after Wall Street had fallen on Tuesday.

Powell's comments kept the dollar broadly steady, which in turn rooted the Japanese yen near 34-year lows.

Two-year Treasury yields retested 5% overnight, while 10-years held near a five-month high on the diminishing expectations of Fed easing this year.

Euro zone bond yields also continued to climb, trading near a 1-1/2-month high. Germany's benchmark 10-year yield was last 0.3 basis points higher on the day at 2.489%.

Earlier, MSCI's broadest index of Asia-Pacific shares outside Japan rose 0.4%, after plunging more than 4% in the past three sessions. Japan's Nikkei, however, dropped 1.3% to its lowest in two months.

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An electronic screen displaying Japan's Nikkei share average is pictured in Tokyo, Japan March 4, 2024. REUTERS/Kim Kyung-Hoon/File Photo

Still, Taiwanese shares outperformed regional stocks with a gain of 1.6%, as chip-making giant Taiwan Semiconductor Manufacturing Co rose 2% ahead of its earnings report.

SLOW BUT STEADY GROWTH

The International Monetary Fund said on Tuesday the global economy was set for another year of slow but steady growth, with U.S. strength pushing world output through headwinds from lingering high inflation, weak demand in China and Europe, and spillovers from two regional wars.

Tensions in the Middle East are still running high. Israel vowed to respond to Iran's weekend attack despite international calls for restraint, although its war cabinet put off a meeting to decide on its response until Wednesday.

The dollar index, which measures the greenback against its major peers, was last at 106.39. The beleaguered yen was last steady at 154.54 per dollar as the prospect of Japanese government intervention in currency markets loomed, though so far there has been no action from Tokyo beyond from verbal warnings.

The New Zealand dollar gained 0.4% to $0.5902 after first-quarter inflation data showed domestically driven price pressures were surprisingly strong, adding to signs that the last mile to get inflation back to target could be bumpy.

In commodities, oil prices slipped as demand concerns outweighed heightened tension in the Middle East. Brent futures fell 0.3% to $89.74 a barrel, while U.S. crude dropped 0.4% to $86.05 a barrel.

Gold, seen as a safe haven, eased 0.1% to $2,379 per ounce, slipping away from a record high of $2,431.29.

(Reporting by Tom Wilson in London and Stella Qiu in Sydney; Editing by Sam Holmes and Mark Potter)

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