© Reuters. File photo: A passerby walks past an electronic monitor displaying the exchange rate between the Japanese yen and the US dollar outside a brokerage firm in Tokyo on Jan. 18, 2023. REUTERS/Issei Kato
LONDON (Reuters) – A recent wave of optimism that aggressive monetary tightening by major central banks is nearly complete has faded as signs central banks may need to keep rate hikes on hold longer. Global stocks paused near five-month highs on Wednesday.
The Australian dollar rallied last quarter after data showed inflation hit a 33-year high of 7.8%, confirming that the Reserve Bank of Australia (RBA) could raise interest rates further next month. It soared to its highest level in over five months.
Canada’s central bank is widely expected to raise interest rates again later on Wednesday, and recent strong data confirm hopes for another move.
Trading in European stocks was lackluster, with the broad euro losing 0.4%. US stock futures showed a weak Wall Street open.
Globally, stocks have rallied significantly this year on hopes that inflation will peak after the 2022 crash and U.S. interest rate rises will slow. The dismantling of COVID controls and the reopening of borders in China have further boosted investor sentiment.
The MSCI global stock index, which rose more than 6% this month, was broadly stable near a five-month high.
“I think risk assets have gone too far,” said Guy Miller, chief market strategist at Zurich Insurance Group (OTC:).
“Broadly speaking, the problem we have is that the economy is getting worse, and the data we are seeing point in that direction.”
In Asia, MSCI’s broadest index of non-Japanese Asia-Pacific equities hit a seven-month high. Markets in China and Taiwan were still closed for the Lunar New Year holidays, so trading volumes were subdued.
Shares of Microsoft (NASDAQ:) fell 2.4% in premarket trading. Microsoft announced Wednesday that it is investigating a network issue affecting multiple services.
TechTitan’s better-than-expected results on Tuesday showed some strength in the face of a weak economy, but weaker earnings growth points to tougher times for the sector.
soaring Australian dollar
In currency markets, the Australian dollar surged to $0.7123 on the latest inflation data. The Australian currency gained 1.6% this week, poised for its biggest weekly gain in over two months.
Investors sharply narrowed the chances of the RBA raising the cash rate by a quarter of a percentage point to 3.35% at its Feb. 7 meeting. Previously, some analysts believed the RBA could pause its tightening campaign.
The Canadian dollar was trading almost unchanged at 1.3370 against the greenbacks ahead of the Bank of Canada interest rate decision.
“The once hawkish Bank of Canada faces a dilemma today: to raise rates or not,” said Francesco Pesore, currency strategist at ING.
“This is at least what market pricing seems to suggest, with today’s announcement pricing in a 17bps tightening,” he said, adding that he expected a 25bps rate hike.
The euro fell 0.2% to around $1.0887, just above its recent nine-month peak.
The data showing German corporate morale rising in January doesn’t seem to be enough reason to push the single currency higher at this point.
Germany’s Ifo Institute said the business environment index rose in line with consensus to 90.2, up from 88.6 in December, according to a Reuters analyst poll.
The New Zealand dollar weakened after data showed annual inflation of 7.2% in the fourth quarter, falling below the central bank’s forecast of 7.5%.
Crude oil prices rose slightly to $86.40 per barrel, up 0.3% after falling 2.3% in the previous session. West Texas Intermediate (WTI) rose 0.4% to $80.44 on Tuesday after he fell 1.8%.
Gold fell 0.7% to $1,923 an ounce, off the nine-month peak mentioned in the previous session.