New York: Global stocks and bonds closed higher on Wednesday on cautious optimism about the new year after a brutal 2022, although US stocks eased off session highs after the Federal Reserve released minutes from its December meeting that struck a hawkish note.
The MSCI All-World index added 0.65%, receding from earlier highs and in tandem with US stocks, which pulled back after the Fed's minutes showed it was worried about any market "misperception" that its commitment to fighting inflation was flagging.
'Modestly hawkish Fed'
Describing the minutes as "modestly hawkish", analysts at Citi said they expect the Fed to raise rates by 50 basis points in February, and for U.S. rates to peak between 5.25% and 5.5%. US rates stand at 4.25% to 4.5% currently.
"Fed officials are clearly growing more uncomfortable with the market underpricing their likely policy path and may use more hawkish rhetoric to drive front-end rates higher and financial conditions tighter," the analysts at Citi said.
US stocks still ended up on the day. The S&P 500 climbed 0.75%, the Dow Jones Industrial Average rose 0.4%, and the Nasdaq Composite climbed 0.7%.
Data released on Wednesday showed U.S. job openings falling less than expected on the last day of November, indicating a still-tight labour market that could allow Fed to keep rates higher for longer.
The pan-European STOXX 600 jumped 1.4% as a lower inflation reading from France boosted sentiment, building on positive data from Germany earlier in the week.
Rally in Euro bonds
Euro zone government bonds extended their rally from the first two trading days of 2023, with the benchmark German 10 year yield sliding around 10 basis points on signs central banks are making progress against inflation.
The yield on 10-year U.S. Treasury notes fell to 3.679%, and 2-year Treasury yields, which typically move in step with interest rate expectations, slipped to 4.3534%.
MSCI's broadest index of Asia-Pacific shares outside Japan jumped 1.8% in its third straight day of gains for the year. In 2022 it fell 20%, its biggest annual decline since 2008.
The modest recovery in stocks and bonds showed optimism about two factors that made 2022 a hellish year for investors: the constant drumbeat of rate hikes to fight inflation and China's economy-throttling anti-COVID measures.
But investors in other assets were jittery. Oil prices fell sharply, as concerns about global demand persisted amid signs of weakening activity in the main engines of global growth: the United States, Europe and China.
"Fresh warnings about the effect of aggressive rate hikes on the U.S. economy are rattling traders again, with the oil price continuing its march downwards," said Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown.
U.S. crude fell 4.85% to $73.2 per barrel, while Brent was at $78.07, down 4.9% on the day.
Hopes for less aggressive rate hikes boosted non-yielding gold, with spot prices for the precious metal hitting $1,856.57 per ounce, their highest since mid-June.
Dollar index down
The dollar index, which measures the greenback against six other currencies, fell 0.45% as commodities currencies like the Australian dollar gained and the euro rose on the positive French and German inflation data.
Sterling was last trading at $1.20575, up 0.75%, while the euro rose 0.54% to $1.06050, coming off a three-week low of $1.0519 touched overnight. The Japanese yen softened against the dollar at 132.500 per dollar.
Asian stocks down as Covid surge in China spooks investors
Asia-Pacific stocks fell in early trade on Thursday as the Covid surge in China cast a shadow over markets across the region.
Investors had cheered the easing of China's strict zero-Covid controls - which had hammered the world's second-largest economy - but are now worried about the impact of the outbreak on global supply chains and inflation.
The United States, Japan and Italy have imposed restrictions on visitors from China, and a senior US official warned that the surge increases the potential for new Covid variants to emerge.
Hong Kong and Tokyo were both down more than one percent in early trade. Sydney, Singapore, Shanghai, Taipei and Seoul were also in the red.
Volumes were thin in the final trading week of the year, with investors chewing on the prospects of a recession in 2023, and how central banks - especially the US Federal Reserve - are going to handle the fight against rampaging inflation.
Oil prices drop
The plunge in Asia-Pacific shares followed sharp falls on Wall Street on Wednesday, where the main indexes all closed in the red.
The "Santa Claus rally" is a seven-session stretch over Christmas and New Year that typically sees stocks drifting higher in light trade. Analysts said low-volume, low-risk trade will continue until the year ticks over.
In oil markets, the two main crude contracts were both lower, with traders concerned about the possibility of China's Covid outbreak fuelling a global resurgence of the disease and depressing energy demand.
Meanwhile, Germany shrugged off Russia's ban on oil sales to countries and companies that comply with a price cap on its crude exports.
The price ceiling of $60 per barrel agreed by the European Union, G7 and Australia came into force this December in response to the Russian invasion of Ukraine. It seeks to restrict Russia's revenue while making sure it keeps supplying the global market.
Key figures at around 0315 GMT
Tokyo - Nikkei 225: DOWN 1.3 percent at 25,998.76
Hong Kong - Hang Seng Index: DOWN 1.0 percent at 19,704.05
Shanghai - Composite: DOWN 0.2 percent at 3,081.08
Euro/dollar: UP at $1.0624 from $1.0618 at 2215 GMT on Tuesday
Pound/dollar: UP at $1.2039 from $1.2018
Euro/pound: DOWN at 88.26 pence from 88.30 pence
Dollar/yen: DOWN at 133.68 from 134.39 yen
West Texas Intermediate: DOWN 0.6 percent at $78.47 per barrel
Brent North Sea crude: DOWN 0.5 percent at $82.83 per barrel