Global stocks staged a recovery on Wednesday as strong earnings from U.S. technology companies and OPEC+ plans for moderate oil output helped to counter jitters over the pace of central banks’ interest rate hikes.
The STOXX index of 600 European companies rose 0.45%, up for a third straight session, to recoup nearly half its losses during January’s global rout in shares.
Crude oil eyed seven-year highs and the dollar eased, while on Wall Street, the Dow Jones Industrial Average rose 0.01% and the S&P 500 gained 0.31%.
The tech-heavy Nasdaq Composite dropped 0.14%, after earlier gains.
Pleasing earnings from chipmaker Advanced Micro Devices (NASDAQ:AMD) also bolstered sentiment in the tech sector, with Facebook (NASDAQ:FB) parent Meta reporting earnings later on Wednesday.
But record high euro zone inflation of 5.1% in January was a surprise, defying expectations of a drop to 4.4%, sending German government bond yields to multi-year highs and the euro surging.
The ECB has insisted that price growth is temporary and benign, but markets will be looking for any change in tone when it meets on Thursday.
“The unexpectedly high inflation rate is a slap in the face for the ECB. It will have to finally recognize the massively increased inflation risks and take its foot off the pedal of monetary policy,” said Joerg Kramer, chief economist at Commerzbank (DE:CBKG).
In Asia, a number of markets, including China, were closed for the Lunar New Year holidays.
Global equities in January had their worst month since March 2020, at the height of the initial wave of the COVID-19 pandemic, Deutsche Bank (DE:DBKGn) research showed, but the rebound so far has been patchy.
Investor sentiment has been swinging between concerns over Federal Reserve and other central banks’ tightening and confidence in the economic recovery. Wednesday’s earnings outlook is helping to ease the uncertainty, but many dangers, including stubborn inflation and geopolitical risks remain a threat.
“The tug of war between higher interest rates and corporate earnings continues,” said Jake Manoukian, who leads U.S. investment strategy at J.P. Morgan Private Bank.
“We have a constructive view on the economy, driven largely by strong wage growth and healthy consumer balance sheets, but there are some issues percolating underneath the surface.”
Markets are pricing in a string of rate hikes from the Federal Reserve and the Bank of England, analysts said.
The BoE meets on Thursday, and markets expect the central bank to increase UK rates.
Fed officials sought to play down the chance of a half-point rate rise in March. Though he said he saw three successive hikes starting in March, St. Louis Fed President James Bullard pushed back at the idea of an initial half-percentage point move.
Friday’s U.S. non-farm payroll figures will also be closely watched.
OIL EYES OPEC+
Oil prices jumped on Wednesday, closing in on a seven-year high, after OPEC+ stuck to its planned output increase despite pressure from top consumers to raise production more quickly.
An OPEC+ source told Reuters that the producer group agreed to increase oil production by 400,000 bpd from March after a short meeting.
U.S. crude recently fell 0.57% to $87.70 per barrel and Brent was at $88.84, down 0.36% on the day. [O/R]
The bond market sell-off that has upended financial markets since the start of the year stalled on Tuesday, with benchmark U.S. 10-year Treasury yields hovering near their lowest levels in a week. [GVD/EUR]
Benchmark U.S. 10-year Treasury yields were down 4.4 basis points to 1.756%. The two-year U.S. Treasury yield, which typically moves in step with interest rate expectations, was down 1.5 basis points at 1.150%.
Spot gold added 0.4% to $1,808.58 an ounce.
Treasury yields, which move inversely to prices, rose by some measures at their fastest pace since 2009 in January as investors started to price in the possibility that the Fed could raise interest rates as many as five times this year.
As the dollar eased, risk-sensitive currencies such as the Australian dollar, the euro, and the British pound gained. The dollar index fell 0.239%, with the euro up 0.24% to $1.1296,
The rouble strengthened to a near two-week high past 76 against the dollar after the Kremlin said Russia had plans in place to hedge against possible U.S. sanctions Washington threatens to impose should Russia invade neighboring Ukraine.
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