Global markets edge higher with Jackson Hole in focus

London — Share markets pushed higher and Europe’s bond markets and euro stole a breather from energy-price driven sell-offs on Thursday, as investors waited to hear the latest reaction of the world’s top central bankers to soaring inflation.

Asia had tailgated Wall Street higher overnight and Europe’s bourses did the same as oil and gas stocks jumped a further amid intensifying worries of a Russian gas supply crisis.

GDP data from Germany had brought relief too. News that the continent’s largest economy narrowly avoided a contraction in the second quarter also helped lift the battered euro back above parity against the dollar.

Traders weren’t sure how long it would last. The European Central Bank is due to publish minutes later from its most recent meeting, where it hiked rates by 50 basis points. Gas prices have continued to surge since then, feeding recession fears.

The start of the Federal Reserve’s annual monetary policy conference in Jackson Hole, Wyoming, was also looming on Friday. The focus sits squarely on how much higher US interest rates might need to go if inflation there keeps rising.

“It’s all treading water until we get a hold on what Fed chief [Jerome] Powell has to say at Jackson Hole,” said John Hardy, Saxo Bank’s head of FX strategy.

On the euro, which had clawed its way to $1.0003, he added: “We need to see some relief from the gas and power price surge to get some real traction ... There is dire pressure on that front.”

The 0.7% rise in European stocks left MSCI’s 47-country index of world shares up 0.4%, with US stock futures pointing to similar gains for the S&P 500 later.

Borrowing costs in the bond markets eased slightly too after a hectic few days that have seen another sharp surge, especially in Europe where gas prices have now more than trebled since June alone.

Germany’s 10-year yield was about 2bps lower at 1.35% after touching 1.39%. Italy’s 10-year yield was also down to 3.65% and US yields, which are the main driver of global borrowing costs, hovered just above 3%, compared with 2.51% at the start of the month.

In the hole 

Investors have pared back expectations that the Fed could tilt to a slower pace of rate hikes as US inflation remains at 8.5% on an annual basis, well above the Fed’s 2% target. But Powell’s speech, due on Friday, will be scrutinised for any indication that an economic slowdown might alter the central bank’s strategy.

Investors now expect the Fed Funds rate to peak at 3.8% in March 2023, up from 3.62% a fortnight ago, said Tapas Strickland, NAB’s economics director.

“Market moves at least are consistent with the hawkish pushback seen by Fed officials over recent weeks,” he added.

Interest rate futures imply a 60% chance of a 75 basis point Fed hike in September, up from 50% earlier this week.

Still, MSCI’s broadest index of Asia-Pacific shares outside Japan edged up 0.7%, after US stocks ended the previous session with modest gains. Australian shares climbed 0.7%, while Japan’s Nikkei stock was up by 0.72%.

China’s CSI300 rose 0.8% and Hong Kong's Hang Seng index surged 3.6% in a shortened trading session due to a typhoon.

“Equities markets at the moment see bad news about the economy as being essentially good news because to them it means that the Fed might not tighten as much as thought,” said Rob Subbaraman, head of global macro research at Nomura. “But equities markets could have to reassess that after Jackson Hole.”

In the currency markets, the dollar was almost 0.5% weaker including 0.4% against the euro and 0.5% against the yen to 136.62.

Reuters