Asian and European markets rose on Thursday after Wall Street surged, fueled by hopes that the US Federal Reserve may slow the pace of interest rate hikes to fight inflation.
The dollar also struggled to recover from a sell-off – it was at a three-week low against the yen – in response to comments from Fed Chair Jerome Powell that his next super-sized surge could be his last .
However, analysts warned that the initial joy that sent New York’s three main indices soaring may be short-lived as the global economy continues to face multiple headwinds and inflation is unlikely to ease anytime soon.
As expected, the Fed raised borrowing costs by 75 basis points to a range of 2.25 to 2.5 percent, near neutral levels, which it believes will neither boost nor slow economic growth.
Rates are forecast to rise as high as 3.8 percent in 2023 as the bank tries to control runaway inflation.
There are growing concerns that the sharp rise in interest rates is weighing on the world’s leading economy and could push it into recession.
However, in his comments after the meeting, Powell said he didn’t think that was the case because “there are too many areas of the economy that are doing too well.”
He noticed that growth slowed.
Powell added that officials would not offer any guidance on their next move, but would make any decision on a meeting-by-meeting basis.
While he said another “unusually large hike might be appropriate” in September and officials “wouldn’t hesitate” to raise a percentage point, markets took heart from the suggestion that the bank was ready to step down towards the end to slow down of the year.
On Wall Street, the Dow and S&P rallied and the Nasdaq rose more than four percent – its best one-day gain since late 2020 – as tech companies were caught in a wave of optimism. The sector is more vulnerable to higher interest rates.
And Asia followed suit, albeit with more muted gains.
Shanghai, Tokyo, Sydney, Seoul, Singapore, Mumbai, Manila, Jakarta and Wellington were also clearly in the green.
But Hong Kong collapsed as the city’s de facto central bank followed the Fed in raising rates on its currency peg.
London, Paris and Frankfurt opened with profits.
The prospect of a slower pace of interest rate hikes weighed on the dollar against most other currencies, and it hit its lowest level against the yen since July 6 on Thursday.
However, there was a warning that the positive sentiment is unlikely to last.
“This market move is hope triumphing over experience,” BlackRock Inc.’s Jeffrey Rosenberg told Bloomberg Television. “I would be a bit careful here.”
And Citigroup’s Andrew Hollenhorst and Veronica Clark added that dealers appeared to have misjudged Powell’s statements.
“We’re reading President Powell’s press conference as more hawkish than the market’s interpretation,” they said, adding that non-food and energy inflation readings “will push the Fed to rise more aggressively than they or the markets expect.”
All eyes are now on Thursday’s release of second quarter growth data. After a 1.6 percent decline in the previous three months, another negative read would plunge the economy into a technical recession.
An expected phone call between Joe Biden and China’s Xi Jinping will also top the agenda for investors as the world’s superpowers try to navigate a period of rising tensions. Updates on US tariffs and Taiwan will be among the main areas of focus.
Oil prices rose after data showed a sharp drop in US inventories, while Powell’s comments on the economy allayed recession concerns and a weaker dollar made the commodity cheaper for foreign-currency buyers.
– Key figures around 0720 GMT –
Tokyo – Nikkei 225: up 0.4 percent at 27,815.48 (close)
Hong Kong – Hang Seng Index: down 0.1 percent at 20,641.78
Shanghai – Composite: up 0.2 percent at 3,282.58 (close)
London – FTSE 100: up 0.6 percent to 7,390.79
Euro/Dollar: DOWN at $1.0208 from $1.0201 late Wednesday
Pound/dollar: rise to $1.2160 from $1.2151
Euro/Pound: DOWN at 83.95p from 83.85p
Dollar/Yen: DOWN at 135.41 yen from 136.51 yen
West Texas Intermediate: up 1.5 percent to $98.71 a barrel
North Sea Brent Crude: up 1.2 percent to $107.88 a barrel
New York – Dow: up 1.4 percent at 32,197.59 (close)
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