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Stocks, bonds extend precarious rally on hope rate hikes will ease

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  • European and Asian stocks rise 1% as optimism in 2023 continues
  • Oil falls on lingering demand concerns
  • Dollar falls as euro boosted by inflation data

LONDON, Jan 4 (Reuters) – Stocks and bonds rose across the world on Wednesday as investors tiptoed into the new year with a tentative optimism after a brutal 2022, seeking to encourage inflation data. in the hope that rate hikes may be less aggressive than feared.

The pan-European STOXX 600 (.STOXX) was up 1.15% by 11:30 GMT as a lower inflation reading from France boosted sentiment, building on positive data out of Germany earlier in the week.

Euro zone government bonds also extended their recovery from the first two trading days of 2023, with Germany’s 10-year benchmark yield falling 10 basis points in signs that central banks are making progress against inflation.

The 10-year Treasury yield fell to 3.6809%, and the 2-year Treasury yield, which normally tracks interest rate expectations, fell 6 basis points to 4.3409%.

MSCI’s broadest index of Asia-Pacific stocks outside Japan (.MIAPJ0000PUS) rose 1.69% and is set for a third straight day of gains for the year, having fallen 20% in 2022, its worst performance since 2008.

The modest recovery in stocks and bonds showed optimism about two of the factors that made 2022 such a hellish year for investors, namely the steady pace of rate hikes to fight inflation and the anti-COVID measures stifling the economy. from China.

But jitters in other assets showed the way forward is far from smooth as policymakers try to balance encouraging economic growth with controlling inflation.

Oil prices fell sharply as global demand concerns persisted amid signs of weakening activity in key growth drivers such as the US, Europe and China.

“Further warnings about the effect of aggressive rate hikes on the US economy are rattling traders again as the price of oil continues to slide,” said Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown.

US crude fell 2.5% to $75.03 a barrel, while Brent was at $80.09, down 2.42% for the day.

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Wednesday’s positive stock market momentum was a prelude to the release of important data that could shift momentum the other way.

Minutes from the US Federal Reserve meeting in December, when it warned that rates may need to stay higher for longer, are due to be released at 19:00 GMT. Investors will look to the minutes to find out whether further policy tightening is likely, as well as checking out the US job vacancies data at 3pm GMT.

“The market has had a very hesitant start to the year … (and) is still struggling with the notion of what we’ll see from the Fed this year,” said Rob Carnell, ING’s head of Asia-Pacific research.

“There are two camps out there and they are fighting for dominance in terms of vision. Some days higher wins longer, some days (the) higher field than shorter wins,” Carnell said.

US stocks, which started the year more tentatively amid big declines in majors like Tesla, looked set to open with modest gains. E-mini futures for the S&P 500 were up 0.44%.

The US central bank said last month, when it raised interest rates by 50 basis points, that terminal rates may need to stay higher for longer to fight inflation.

Markets, however, are pricing in rate cuts for late 2023, with federal funds futures suggesting a 4.25% to 4.5% range through December.

Hopes for less aggressive rate hikes buoyed non-yielding gold, with spot prices for the precious metal hitting $1,858 an ounce at 1148 GMT, the highest level since mid-June.

The dollar index, which measures the dollar against six other currencies, fell 0.6%, with commodity currencies like the Australian dollar gaining and the euro rising on positive French and German inflation data.

The pound last traded at $1.2055, up 0.74%, while the euro rose 0.6% to $1.0610, coming off a three-week low of $1.0519. played at night.

The Japanese yen strengthened 0.12% against the dollar to 130.85 to the dollar.

Lawrence White and Ankur Banerjee; Editing by Sam Holmes, Jan Harvey and Chizu Nomiyama

Our Standards: Thomson Reuters Trust Principles.

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