Global stock markets made notable gains, while the dollar and bond market yields remained stable on Thursday as investors anxiously awaited U.S. inflation data and minutes from the European Central Bank meeting. These events promised to contribute to the ongoing, fervent discussion surrounding the trajectory of interest rates.
Despite the lingering uncertainty over escalating tensions in the Middle East, European stocks reached a three-week high early in the day, following a 1.75% surge in Tokyo that had a similar effect on Asian markets.
Furthermore, Wall Street futures showed a 0.3% uptick, with the dollar hovering near a two-week low, influenced by caution expressed in the Federal Reserve meeting minutes from the previous day regarding the economy among rate-setters.
In addition to these factors, investor confidence was bolstered by the news that Central Huijin Investment, a Chinese state fund, had increased its stakes in the country’s four major banks. This development significantly boosted the broader Asian market, with Hong Kong’s Hang Seng index surging by 2.0%.
However, China simultaneously introduced measures to prohibit domestic brokerages and their overseas units from accepting new mainland clients for offshore trading, aiming to restrict capital outflows.
The recent buoyancy in markets can also be attributed to remarks from Fed officials that suggest U.S. interest rates, which often influence global borrowing costs, may have reached their peak. U.S. Fed Governor Christopher Waller noted that higher market interest rates could help the Fed control inflation and allow the central bank to adopt a “wait and see” approach regarding the necessity of further rate hikes.
This viewpoint aligns with similar statements from Fed Vice Chair Philip Jefferson and Dallas Fed President Lorie Logan during the week.
In European trading, the dollar remained close to a two-week low, while the yen was under pressure at 149.11 per dollar, nearing the critical 150 level, which could prompt intervention from Japanese authorities.
The likelihood of a November Fed rate hike diminished further, dropping to just 9%, down from 13.2% the previous day. CME FedTool indicated a 70% chance that interest rates have already reached their peak.
With the highly anticipated shift in Fed policy on the horizon, traders are bracing themselves for the release of the U.S. consumer inflation report. The stakes are even higher than usual after the producer price inflation data released on Wednesday exceeded expectations.
Economists anticipate that the headline Consumer Price Index (CPI) will have risen by 0.3% in September on a monthly basis, a slowdown from the 0.6% increase in August. Core CPI is expected to remain steady at 0.3%.
Alan Ruskin, Chief International Strategist at Deutsche Bank, emphasized that a core rate exceeding 0.4% on a monthly basis would catch investors off guard, potentially influencing the bond market’s outlook on stronger data. Geopolitical risks are also likely to temper bearish trading in the bond market.
In response to heightened geopolitical tensions resulting from recent deadly attacks in Israel, long-term U.S. Treasury yields eased for a third consecutive session. Ten-year U.S. yields fell by 3 basis points to 4.57%, down from their recent 16-year high of almost 4.9%.
European government bond yields remained largely stable, with Germany’s Bund yield at 2.74%.
Oil prices, which had fallen for two consecutive days, saw a slight rebound following Saudi Arabia’s pledge to stabilize the market amid concerns that the Israel-Palestine conflict could disrupt the global oil supply. Brent futures in London rose by 1% to $86.65 a barrel after a 2% drop in the previous session, while U.S. West Texas Intermediate crude increased by 0.7% to approximately $84, following a 2.9% decline on Wednesday.
Gold prices also rose by 0.3% to $1,878.98 per ounce, reaching a two-week high.
Christopher Granville, Managing Director of Global Political Research at TS Lombard, noted that violence in the Middle East tends to have a significant impact on global markets when it aligns with existing concerns over oil supply, as it did in the lead-up to the second Gulf War. He suggested that the risk scenario to watch for potential global market impact involves Israel launching an attack on Iran due to its support for Hamas.