December 8, 2023

Brighton Journal

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Stocks struggle as higher oil prices set the stage for a hawkish Fed

Stocks struggle as higher oil prices set the stage for a hawkish Fed
  • Brent crude settled at just over a 10-month high
  • Fed looks on hold; Focus on projections and pressure
  • China leaves lending rates unchanged

SINGAPORE (Reuters) – Asian stocks struggled to advance on Wednesday, while 10-year U.S. Treasury yields held steady at their highest levels in 16 years as rising oil prices stoked inflation and created conditions for the Federal Reserve to expect oil prices to remain stable. Interest is higher for longer. .

Brent crude futures fell from their highest levels in 10 months overnight, but were up 30% at $94.26 a barrel in three months thanks to a pledge by Saudi Arabia and Russia to extend production cuts.

Rising energy costs led to a larger-than-expected rise in Canadian inflation, pushing up the value of the Canadian dollar and spurring selling in the Treasury market, overnight data showed.

10-year Treasury yields hit their highest levels since 2007 at 4.371% overnight and were most recently at 4.36%.

MSCI’s broadest index of Asia-Pacific shares outside Japan (.MIAPJ0000PUS) fell 0.2%, as did Japan’s Nikkei (.N225). Overnight on Wall Street, the S&P 500 also fell 0.2%.

Futures pricing suggests almost no chance of a Fed hike at 1800 GMT, but traders, who have begun to back off their bets on cuts in 2024 and will focus closely on the US central bank’s economic outlook and head of Jerome Powell’s news conference, said.

“Many participants in the previous dot chart expected a cut in 2024,” said Sam Raines, managing director of research firm CORBŪ in Texas. “There is no reason for those dots to move significantly.”

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“The ‘risk management’ aspect of Powell’s speech is likely to be: positive regarding downward interest rate adjustments as inflation declines or (but) negative regarding future tightening threats.”

The Fed meeting leads off a busy week of central bank meetings and data over the next few days. British inflation figures are scheduled for release on Wednesday, followed by central bank meetings in Sweden, Switzerland, Norway, Britain and Japan on Thursday.

Sterling stable ahead of CPI

Foreign exchange markets were largely flat ahead of the Fed meeting, although the yen continued to face pressure that early Wednesday prompted a reaction from Japan’s top financial diplomat.

Masato Kanda told reporters that Japanese authorities have always been in close contact with their American counterparts, and that he would not rule out any options if “excessive movements continue.”

The yen has fallen by 11% against the dollar this year as expectations increase that US interest rates will remain high and Japanese interest rates low. The yen hit a 10-month low of 147.95 yen to the dollar late last week and was trading at 147.80 early Wednesday.

Benchmark 10-year Japanese government bonds remain hedged around 0% but at 0.72% have been creeping toward the Bank of Japan’s revised tolerance for yields of 1% either side of zero.

The euro settled at $1.0684. Commodity exporters’ currencies were strong, with the New Zealand dollar holding on to modest recent gains at US$0.5940 after strong gains in dairy prices at last night’s auction.

China left lending interest rates unchanged on Wednesday, as expected, and kept the yuan steady at 7.2946 to the dollar.

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The Australian dollar settled at $0.6415, while the British pound paused its decline and settled at $1.2390 ahead of UK inflation data due at 0600 GMT, with the headline CPI expected to rise to 7% year-on-year.

“The risk is for stronger results given the very strong growth in labor earnings,” said Christina Clifton, a strategist at the Commonwealth Bank of Australia.

“A stronger CPI result could push financial markets to fully price in a 25 basis point BoE hike on Thursday and support sterling.”

Rising yields have capped gold prices, with spot gold last trading at $1,929 an ounce.

Wheat prices, which had fallen due to huge shipments from Russia, stabilized amid expectations that dry weather would reduce production in Australia and Argentina.

Our standards: Thomson Reuters Trust Principles.

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