- European equities up 0.45%, US S&P futures flat
- US yield curve most inverted since 1981
- Brent crude hits 4-week low
LONDON/SYDNEY, Nov 18 (Reuters) – World stocks headed for a 1% loss for the week on Friday, drifting from recent two-month highs after US Federal Reserve officials fired more warning shots on interest rates as the yield on US bond curve priced for a recession.
Dollar and bond yields rose after James Bullard, president of the St. Louis Fed, said interest rates may need to come between 5% and 5.25% from current levels of just under 4.00% to be “sufficiently restrictive to curb inflation.
That was a blow to investors who had bet interest rates would peak at 5% and saw Fed fund futures sell off as markets were more likely to see rates now reach 5-5.25% instead of 4.75-5.0%.
“The Fed has backtracked through their speeches and resisted the market narrative – we will not see a turning point,” said Arun Sai, senior multi-asset strategist at Pictet Asset Management.
Sai said the market is currently “fuming” and will shift focus to the real economy’s response to rising interest rates, such as anecdotal signs of a slowdown in the US labor market.
The MSCI World Equities Index (.MIWD00000PUS) rose 0.17%, while US S&P futures held steady after the S&P 500 Index (.SPX) fell 0.3% on Thursday.
European equities (.STOXX) gained 0.54%, while banks (.SX7P) rose nearly 1% as the European Central Bank gears up to initiate the largest withdrawal of money from the Eurozone banking system in its history.
Banks are expected to repay approximately $500 billion in Targeted Longer-Term Refinancing Operations (TLTRO) loans. The ECB’s announcement is expected at 1105 GMT.
The UK’s FTSE (.FTSE) gained 0.33%, a day after Chancellor of the Exchequer Jeremy Hunt announced tax increases and spending cuts in an effort to reassure markets that the government was serious about inflation.
UK retail sales only partially recovered last month after shops closed in September for Queen Elizabeth’s funeral, data showed Friday, and remained below their pre-pandemic levels as rising inflation weighed on purchasing power.
“While the Bank of England will likely continue to raise interest rates despite a slowdown in the economy, their peak is likely to be lower than the US,” said Dean Turner, chief eurozone and UK economist at UBS Global Wealth Management.
US two-year rates crept back up to 4.48%, somewhat reversing last week’s sharp inflation-driven decline of 33 basis points to a low of 4.29%.
As a result, they remained 69 basis points above the 10-year rate, the largest inversion since 1981 and an indicator of an approaching recession.
The dollar remained flat at 106.65 on a basket of currencies after hitting a quarterly low of 105.30 early in the week.
The US currency was stable at 140.23 yen, but remained above its recent low of 137.67. Sterling rose 0.3% to $1.1904.
The euro remained at $1.0357 after falling from a four-month high of $1.0481 on Tuesday as some policymakers called for caution in tightening.
ECB President Christine Lagarde will deliver a keynote address later Friday that may provide guidance on where the majority at the bank will lean.
MSCI’s broadest index of Asia Pacific stocks outside Japan (.MIAPJ0000PUS) was stable.
Chinese blue chips (.CSI300) fell 0.45% amid reports Beijing had asked banks to monitor liquidity in the bond market after high yields caused losses for some investors.
There were also concerns that a spate of COVID-19 cases in China would cast doubt on plans to ease strict restrictions on movement that have smothered the economy.
Japan’s Nikkei (.N225) fell 0.1% as data showed inflation reached its highest level in 40 years as a weak yen spiked import costs.
Still, the Bank of Japan argues that inflation is largely driven by energy costs beyond its control and that the economy needs super-easy policies.
Brent crude hit a four-week low on concerns about weakening demand in China and further rate hikes by the Fed.
Brent reached a low of $89.51 a barrel, down 0.2%. US crude remained stable at $81.67 a barrel.
Gold gained 0.1% to $1,763 an ounce after reaching a three-month high of $1,786 at the start of the week.
Edited by Bradley Perrett, Sam Holmes and Simon Cameron-Moore
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