LONDON—Share markets pushed higher and Europe’s bond markets and euro stole a breather from energy-price driven sell-offs on Thursday, as investors waited to hear the latest reaction of the world’s top central bankers to soaring inflation.
Asia had tailgated Wall Street higher overnight and Europe’s bourses did the same as oil and gas stocks made another 1.5 percent jump amid intensifying worries of a Russian gas supply crisis.
GDP data from the continent’s largest economy, Germany, had brought relief too. News the country had narrowly avoided a contraction in the second quarter also helped lift the battered euro back above parity against the U.S. dollar.
Traders weren’t sure how long it would last. The European Central Bank is due to publish minutes later from its most recent meeting, where it hiked rates by a bumper 50 basis points. Gas prices have continued to surge since then, feeding recession fears.
The start of the Federal Reserve’s annual monetary policy conference in Jackson Hole, Wyoming was also looming on Friday. The focus sits squarely on how much higher U.S. interest rates might need to go if inflation there keeps rising.
“It’s all treading water until we get a hold on what Fed chief (Jerome) Powell has to say at Jackson Hole,” said Saxo Bank’s head of FX strategy, John Hardy.
On the euro, which had clawed its way to $1.0003, he added: “We need to see some relief from the gas and power price surge to get some real traction … There is dire pressure on that front.”
The 0.7 percent rise in European stocks left MSCI’s 47-country index of world shares up 0.4 percent with U.S. stock futures pointing to similar gains for the S&P 500 later.
Borrowing costs in the bond markets eased slightly too following a hectic few days that have seen another sharp surge, especially in Europe where gas prices have now more than trebled since June alone.
Germany’s 10-year yield was down around 2 bps to 1.35 percent after touching 1.39 percent. Italy’s 10-year yield was also down to 3.65 percent and U.S. yields, which are the key driver of global borrowing costs, hovered just above 3 percent, compared to 2.51 percent at the start of the month.
Investors have pared back expectations that the Fed could tilt to a slower pace of rate hikes as U.S. inflation remains at 8.5 percent on an annual basis, well above the Fed’s 2 percent target. But Chair Jerome Powell’s speech due on Friday will be scrutinized for any indication that an economic slowdown might alter the Fed’s strategy.
Investors now expect the Fed Funds rate to peak at 3.80 percent in March 2023, up from 3.62 percent a fortnight ago, said Tapas Strickland, NAB’s economics director.
“Market moves at least are consistent with the hawkish pushback seen by Fed officials over recent weeks,” he added.
Interest rate futures imply a 60 percent chance of a 75 basis point Fed hike in September, up from 50 percent earlier this week.
Still, MSCI’s broadest index of Asia-Pacific shares outside Japan edged up 0.7 percent, after U.S. stocks ended the previous session with modest gains.
Australian shares climbed 0.7 percent, while Japan’s Nikkei stock index was up by 0.72 percent.
China’s CSI300 rose 0.8 percent while Hong Kong’s Hang Seng Index surged 3.6 percent in a shortened trading session due to a typhoon.
“Equities markets at the moment see bad news about the economy as being essentially good news because to them it means that the Fed might not tighten as much as thought,” said Rob Subbaraman, Nomura’s head of global macro research.
“But equities markets could have to reassess that after Jackson Hole.”
In the currency markets, the dollar was down almost 0.5 percent including 0.4 percent against the euro and 0.5 percent against the yen to 136.62.
Commodity bulls saw Brent crude climb back up to $101.83 per barrel and Europe’s benchmark gas price jumped to another record high of 313.50 euros per megawatt hour. They are now up 640 percent over the last year.
Deutsche Bank strategist Jim Reid said the worry was that the energy situation in Europe keeps getting worse.
“That’s adding to fears that “peak inflation” might not actually have arrived yet for some countries,” he said. “Policymakers are about to face some unenviable choices as they grapple with the worst stagflation we’ve seen in decades.”
By Marc Jones