Asian and European markets rose Wednesday to extend a global rally, as fresh pledges on monetary policy by the Federal Reserve reassured investors who had been rattled last week by the bank’s forecasts of an earlier-than-flagged hike in interest rates.
Wall Street tanked Friday and Asia followed suit Monday as traders contemplated a rate lift-off possibly next year as officials try to prevent overheating and soaring inflation caused by the world’s top economy thundering out of the collapse of 2020.
Fears about the end of ultra-loose policies put in place at the height of the pandemic have haunted trading floors for months, knocking a more than year-long equity rally off stride.
But observers said that repeated Fed promises to maintain the measures until unemployment is tamed and inflation is running consistently hot appear to be sinking in.
On Wednesday, Fed chief Jerome Powell took his turn to reassure.
“A pretty substantial part, or perhaps all of the overshoot in inflation comes from categories that are directly affected by the re-opening of the economy such as used cars and trucks,” he told lawmakers.
“Those are things that we would look to to stop going up and ultimately to start to decline.”
He said the price spikes had been bigger than expected and could last longer than initially thought, but added: “We will not raise interest rates preemptively because we think employment is too high, because we feared the possible onset of inflation.”
“We will wait for actual evidence of actual inflation or other imbalances.”
Earlier in the day, New York Fed boss John Williams said talk on rate hikes remained “way off in the future”.
All three main indexes on Wall Street ended with healthy gains for a second straight day with the Nasdaq at a record, and Asia took up the baton.
Hong Kong led the way rising two percent, while Taipei also piled on more than one percent. There were also advances in Shanghai, Singapore, Seoul, Wellington, Manila and Bangkok, though Sydney fell while Tokyo, Mumbai and Jakarta were flat. London, Paris and Frankfurt opened higher.
The Fed’s acknowledgement of higher inflation and the fact it has brought forward its rate hike forecasts are “a reflection of more positive longer-term dynamics”, said BlackRock Investment Institute strategists led by Jean Boivin.
“We believe the Fed’s new outlook will not translate into significantly higher policy rates any time soon. This, combined with the powerful restart, underpins our pro-risk stance.”
Meanwhile, others say the recent selling could provide an opportunity for markets to take another leg up to fresh highs, with Natixis analyst Jack Janasiewicz calling it “bewildering”, adding: “This caused a nice quick flush out of some weak hands riding the reflation trade and likely reset positioning to a better place.”
Bitcoin extended a rebound Wednesday, sitting above $34,000 after a volatile day that saw it fall below $29,000 for the first time since January.
The unit has taken a hit this week by fresh moves to crack down on cryptocurrencies by China, while analysts warn it could well drop back to $20,000 — having only hit a record near $65,000 in April.
“Bitcoin’s continued sell-off has contributed to a negative outlook by traders driven by bearish news out of China,” said Nick Mancini, a crypto analyst at Trade The Chain.
“The mood among traders is now continuing to sour.”
Oil prices extended gains to sit around multi-year highs on increasing optimism over demand as the world economy reopens and governments talk about easing quarantine measures, allowing easier overseas travel.
Analysts said the lack of progress on the Iran nuclear deal was also providing support as it puts off the return of supplies to the global market from the major producer.
Traders are now looking ahead to the next output meeting of OPEC and other key producers.
Tokyo – Nikkei 225: FLAT at 28,874.89 (close)
Hong Kong – Hang Seng Index: UP 2.0 percent at 28,879.81
Shanghai – Composite: UP 0.3 percent at 3,566.22 (close)
London – FTSE 100: UP 0.2 percent at 7,900.51
Euro/dollar: DOWN at $1.1924 from $1.1942 at 2050 GMT
Pound/dollar: UP at $1.3960 from $1.3951
Euro/pound: DOWN at 85.52 pence from 85.58 pence
Dollar/yen: UP at 110.86 yen from 110.68 yen
West Texas Intermediate: UP 0.7 percent at $73.34 per barrel
Brent North Sea crude: UP 0.8 percent at $75.44 per barrel
New York – Dow: UP 0.2 percent at 33,945.58 (close)