By Dhara Ranasinghe
LONDON (Reuters) – World stocks hit a five-week high on Wednesday on hopes that the pace of U.S. interest rate hikes could soon start to slow, although disappointing earnings from U.S. heavyweights and concern about the outlook meant the mood was already souring.
News that the British government’s plan to repair the country’s public finances will be delayed by more than two weeks to Nov. 17 pushed up bond yields.
European shares meanwhile reversed earlier gains and were lower, while U.S. stock futures fell.
Google-owner Alphabet posted softer-than-expected ad sales after Tuesday’s close and Microsoft missed revenue forecasts, while a warning from Dutch semiconductor supplier ASM added to concerns about slowing economic growth.
Some of Europe’s largest banks warned of growing risks as the economy fizzles after posting stronger-than-expected profits, helped by a trading boom in volatile markets and higher interest rates. Deutsche Bank posted a better-than-expected jump in third-quarter profit, Britain’s Barclays too beat profit forecasts.
MSCI’s World Stock Index touched a five-week high, while Asian shares rallied, in a sign that some investors were taking comfort from a perception that a turn in the global rate-hike cycle may be near.
Although the U.S. Federal Reserve is widely expected to deliver another 75 basis point hike in November, a sense that the Fed could then start to slow its aggressive tightening cycle has lifted sentiment in share markets and taken the edge off a dollar rally.
Data on Tuesday showed slowing home price growth and souring consumer confidence, with some signs that the Fed’s aggressive rate hikes are starting to cool the labour market.
“The MSCI world equity index is now nearly 10% off its lows – a move that has been helped by some stability in Europe and probably the very high cash and underweight equity positions held by the investor community,” said Chris Turner, global head of markets at ING.
“It does feel like it is too early to declare the ‘all-clear’ for equity markets – for example the Fed could well push U.S. real rates deeper into restrictive territory – meaning that we are treating this dollar decline as corrective,” Turner added.
The Bank of Canada is widely expected to raise rates by another 75 bps to contain stubbornly high inflation.
MSCI’s broadest index of Asia-Pacific shares outside Japan rallied more than 1%, while Japan’s Nikkei rose 0.7% having hit its highest level since Sept. 20.
The euro pushed back above $1 for the first time in five weeks, while the dollar index – which measures the dollar’s value against a basket of other major currencies — fell to a three-week low.
“It’s a continuation of the (dollar) sell-off that we’ve seen since the end of last week. Markets are anticipating a potential slowdown in the pace of Fed hiking,” said Lee Hardman a currency analyst at MUFG.
In Australia, inflation raced to a 32-year high last quarter as the cost of home building and gas surged. The surprise added pressure on the central bank to reverse a recent dovish turn, though markets doubt there will be a dramatic shift.
The Aussie dollar rallied more than 1%.
China’s yuan rebounded sharply to close the domestic session at the strongest level in two weeks, as traders and corporate clients raced to liquidate long dollar positions.
Market participants became cautious after major state-owned banks were spotted selling the dollar on Tuesday to stabilise the market, traders said.
Sterling meanwhile rose to its highest since mid-September at around $1.1620, although UK bonds or gilts weakened following news of the delay to the UK fiscal plan.
Investors increased bets on the Bank of England raising its benchmark rate by a full percentage point on Nov. 3 after the news and put the chances of such a move at around 37%, higher than before the announcement of the delay.
(Reporting by Dhara Ranasinghe; Additional reporting by Ankur Banerjee in Singapore; Editing by Kim Coghill and David Holmes)