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London — Shares jumped and most currencies rose against the dollar on Wednesday, as investors discerned a dovish tone in comments from Federal Reserve chair Jerome Powell, though a policy tweak by the ECB meant European bonds sat out the rally.

MSCI’s world share index rose 0.37%, heading back towards the nine-month high it hit in early February, and Europe’s Stoxx 600 index gained 0.85% to a nine-month peak.

Major benchmarks in France, Britain and Germany were all well into positive territory, after shares gained on Wall Street overnight and in Asia earlier in the day.

MSCI’s broadest index of Asia Pacific shares outside Japan rose 0.76%, though Japan’s Nikkei failed to join in the rally after disappointing results from big tech firms including Nintendo.

Powell reiterated in speech on Tuesday that disinflation has begun but warned that Friday’s better-than-expected jobs report showed why the battle against inflation will “take quite a bit of time”.

The data showed a surprising addition of 517,000 new jobs in January and stoked fears that the tight labour market may compel the Fed to remain hawkish. Markets were relieved that that Powell did not lean further into this argument in his speech.

“The market is looking for a dovish message where it can almost regardless. Powell said effectively the terminal rate could be higher than the market expects, but the Nasdaq and S&P 500 were up, though I think they’re wrong,” said Ben Jones, director of macro research at Invesco.

Aggressive rate increases by the Fed and other central banks last year to tame inflation had hurt shares and boosted the dollar, but those trends have reversed this year on signs that inflation had begun to slacken, raising hopes of rate cuts towards the end of this year.

“At the moment markets are all about the Fed, but at some point it has to morph into being about growth and earnings growth as well,” said Jones.

Powell’s avoidance of a more hawkish tone also gave a cue to currency markets, as the euro strengthened 0.23% against the dollar, and the pound gained 0.33%.

“The dollar selling also reflected what Powell didn’t say,” MUFG FX analysts said in a note to clients.

US Treasuries firmed on Wednesday with the benchmark 10-year yield down 3 basis points (bps) to 3.649% and the two-year yield down 4bps. Yields move inversely to prices.

However, bonds in Europe continued to sell off after tumbling the previous day when the European Central Bank said it would cut the interest rate it pays governments on deposits.

Two-year German yields, the most sensitive to any shifts in expectations for interest rates and inflation, rose by as much as 11bps to 2.725% in early trading, the highest since January 3.

The other overnight news was US President Joe Biden’s State of the Union speech in which he challenged Republicans to lift the debt ceiling and support tax policies that are friendlier to middle-class Americans.

Assailing oil companies for making high profits and corporate America for taking advantage of consumers, Biden outlined the progressive priorities of his Democratic Party that are anathema to many Republican lawmakers.

Gold rose, with the spot price up 0.4% to $1882.9 an ounce.


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