Global 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.
Major benchmarks in France, (.FCHI) Britain (.FTSE) and Germany (.GDAXI) were all comfortably in positive territory too, after Wall Street gained overnight and Asia (.MIAPJ0000PUS) rose earlier in the day.
U.S. share futures were around 0.4% lower ahead of Wednesday’s open, however. ,
In an eagerly awaited speech on Tuesday, Powell reiterated that disinflation has begun but warned Friday’s eye-popping jobs report showed why the battle against inflation will “take quite a bit of time”.
The data showed the surprising addition of 517,000 new jobs in January and stoked fears that the tight labour market may compel the Fed to remain hawkish. Investors were relieved that that Powell did not lean further into this argument.
“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&P500 were up. 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 hurt shares and boosted the dollar, but those trends have reversed this year on signs that inflation has started to slacken, raising hopes of rate cuts towards the end of 2023.
“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.
Earnings boosted European oil and gas stocks (.SXEP), the top regional sector on Wednesday with a gain of 2%, as Finnish refiner Neste (NESTE.HE) added 10% and Norwegian oil and gas giant Equinor (EQNR.OL) rose 7% after each reported a strong quarter.
Powell’s avoidance of a more hawkish tone also guided currency markets, with the euro rising as much as 0.29% against the dollar, and the pound gaining 0.49% at one point.
“The dollar selling also reflected what Powell didn’t say,” said MUFG FX analysts in a morning note to clients.
U.S. Treasuries firmed a little with the benchmark 10-year yield down 3 basis points (bps) to 3.6547% and the two year yield down 4 bps.
Yields move inversely to prices.
In Europe, however, bonds continued to sell off following a sharp tumble the previous day after 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 11 bps to 2.725% in early trading, their highest since Jan. 3.
The other overnight news event was U.S. President Joe Biden’s State of the Union speech in which he challenged Republicans to lift the U.S. debt ceiling and support tax policies that were friendlier to middle class Americans.
Assailing oil companies for making high profits and corporate America for taking advantage of consumers, Biden used his prime time speech to outline progressive priorities of his Democratic Party that are anathema to many Republican lawmakers.
Oil prices ticked up on Wednesday, continuing this week’s gains, with Brent crude at $84.05, up 0.4% on the day. U.S. crude rose 0.8% to $77.84 per barrel, helped by the slightly softer dollar.
Gold likewise rose, with the spot price edging up 0.1% to $1876.5 per ounce.