The euro, pound and yen all held their gains against the dollar Thursday and most equities rose as traders grow increasingly hopeful the Federal Reserve will slow its pace of interest rate hikes.
Hong Kong led the gains thanks to a surge in tech firms, extending a recovery from Monday’s rout that was fuelled by worries of Xi Jinping’s tightened grip on power in China.
After a painful year for markets hit by central bank rate hikes to fight soaring inflation, investors have taken heart from several weak US indicators — the latest on the services and real estate sectors — suggesting the economy is slowing.
That has led to speculation officials could be ready to tap the brakes on the increases, while some Fed policymakers have also raised the possibility of a slowdown.
The optimism was boosted Wednesday by news that the Bank of Canada had raised rates less than expected and signalled it is ready to wind down.
“The downshift at the Bank of Canada has further fanned the winds of a similar move by the Fed come December and comes after the (Australian central bank) slowed the pace of hikes to 25 basis points at its October meeting,” said National Australia Bank’s Taylor Nugent.
The news weighed on the dollar, which has surged against other currencies all year owing to the Fed’s rate drive, as US Treasury yields drop.
And on Thursday the euro held above parity with the greenback, a day after breaking the marker for the first time since last month and ahead of an expected European Central Bank rate hike.
The ECB meeting “really depends on not what (it) delivers, but what sort of guidance… President Christine Lagarde offers over future moves going forward for December, at a time when EU inflation is still showing little sign of slowing,” said Micahel Hewson of CMC Markets.
The yen held around 146 per dollar, having hit a 32-year low near 152 on Friday, and sterling was also holding above $1.16 after last month hitting a record low $1.0350 in reaction to then-prime minister Liz Truss’s debt-fuelled mini-budget.
The pound was also enjoying support after former finance minister Rishi Sunak became prime minister, giving hope for some stability after months of upheaval.
The positive performance was mirrored in equity markets, with Hong Kong rising one percent at one point thanks to a rally in beaten-down tech shares.
The Hang Seng Index’s advance follows a rout on Monday in response to Xi’s tighter grip on power and his decision to put in top posts loyalists who backed his zero-Covid strategy of lockdowns.
Among the standout performers, ecommerce giant Alibaba jumped more than eight percent and rival JD.com piled on more than 10 percent. The Hang Seng Tech Index was four percent higher.
The advances came after outsized gains for the firms’ New York-listed shares.
Sydney, Seoul, Singapore, Taipei, Manila, Bangkok, Mumbai, Jakarta and Wellington also rose. However, Tokyo and Shanghai slipped.
London edged up in the morning but Paris and Frankfurt eased back.
Analysts remain cautious owing to the fact inflation is stuck at multi-decade highs in various countries, while the Fed’s November meeting is now in focus.
“The Fed won’t blink next week and the risk of a 75 basis point hike in December should still remain on the table,” said OANDA’s Edward Moya.
“Cracks in the economy are here. Tighter financial conditions are not going away. Meanwhile, inflation and labour stats are not declining fast enough to support a Fed downshift just yet,” he said, adding that there was a risk of overtightening.
“The soft landing playbook just got thrown out the window and now Wall Street needs to gauge how bad of a recession will hit the economy next year.”
Oil prices dipped after Wednesday’s rally that came after US Secretary of State Antony Blinken warned that there was little scope for a new Iran nuclear deal, pointing to the clerical leadership’s conditions.