Markets see much-needed bounce, dollar closes on new highs
Most markets enjoyed a rare advance on bargain-buying Thursday, tracking a Wall Street rally after a series of losses, while dovish comments on future interest rate hikes by Australia’s central bank boss provided a boost to sentiment.
However, the dollar resumed its upward march with the Federal Reserve and European Central Bank expected to announce more bumper increases in borrowing costs.
Equities have been ravaged for weeks by fears that global central bank moves to rein in runaway inflation by ratcheting up borrowing costs will spark fresh recessions in some leading economies.
In turn, the greenback has moved ever higher against its major peers as investors flood into the currency hoping for better returns and as a safe-haven hedge against uncertainty and worldwide turmoil.
On Wednesday, the US unit hit a 37-year high against the sterling, while it was also closing in on a 32-year peak above 147.60 yen owing to the Bank of Japan’s refusal to tighten its monetary policy, seen as the key driver of that rally.
Still, Japanese officials said they were tracking the price movements and hinted at possible action if things did not improve.
The euro is holding its own for now, ahead of an expected hefty rate hike by the European Central Bank later in the day.
However, there was some light, where Reserve Bank of Australia head Philip Lowe said the case for a weaker pace of monetary tightening gained momentum as rates rise. The comments provided a little hope that central banks could be ready at some point for a change of course.
Australian bond yields and the country’s dollar fell, while US Treasury yields also slipped.
For now, observers are certain the US dollar will continue to attract strong interest for as long as the Fed keeps ramping up interest rates.
Those views were justified by Vice Chair Lael Brainard, who warned that policymakers would keep hiking rates until they have finally brought prices under control.
“We are in this for as long as it takes to get inflation down,” she said in comments prepared for a conference in New York, adding that she understood this would have a severe impact on families.
The Fed holds its next policy meeting on September 21, with a third successive 75-basis-point lift forecast.
Equity traders mostly followed their US counterparts in returning to buying, with many believing the market had fallen too far too fast.
Tokyo led the gains, helped by data showing the Japanese economy performed better than initially thought in the second quarter, while Sydney was also boosted by the prospect of a slowdown in the pace of Australian rate hikes.
There were also gains in Seoul, Singapore, Wellington, Taipei, Manila, Mumbai, Bangkok and Jakarta but Hong Kong and Shanghai bucked the trend.
London, Paris and Frankfurt all rose at the open.
Still, the mood on trading floors remains downbeat, with OANDA’s Craig Erlam saying: “Given the economic backdrop, this could be nothing more than a dead-cat bounce. Of course, there may be more potential next week if the US delivers a favourable inflation report.”
News that China had extended a lockdown in the megacity of Chengdu added to worries about the world’s number-two economy as officials stick rigidly to their growth-killing zero-Covid strategy.
The shutdowns in China, which have impacted tens of millions across the country, were adding to hefty oil sales as traders fret over the impact on demand.
The commodity was already under pressure owing to bets on a recession caused by bank rate hikes, with both main contracts down around $50 from the peaks seen in the immediate aftermath of Russia’s invasion of Ukraine. They are now around eight-month lows.
And while Brent and WTI rose Thursday, they were nowhere near recovering the previous day’s rout of more than five percent, which came despite Russian President Vladimir Putin’s warns he would cut off energy to Europe if it imposed price cap sanctions.
“Some bargain-hunting buying is to be expected after a dive like” Wednesdays, said Vandana Hari at Vanda Insights.
– Key figures at around 0720 GMT –
Tokyo – Nikkei 225: UP 2.3 percent at 28,065.28 (close)
Hong Kong – Hang Seng Index: DOWN 0.8 percent at 18,883.00
Shanghai – Composite: DOWN 0.3 percent at 3,235.59 (close)
London – FTSE 100: UP 0.3 percent at 7256.31
Dollar/yen: UP at 144.00 yen from 143.79 yen on Wednesday
Euro/dollar: DOWN at $0.9998 from $1.0012
Pound/dollar: DOWN at $1.1510 from $1.1535
Euro/pound: UP at 86.83 pence from 86.74 pence
West Texas Intermediate: UP 0.5 percent at $82.33 per barrel
Brent North Sea crude: UP 0.3 percent at $88.28 per barrel
New York – Dow: UP 1.4 percent at 31,581.28 (close)