Europe’s broad STOXX 600 index rose 0.6% recovering after a drop the day before and heading back towards a record high, while MSCI’s broadest index of Asia-Pacific shares outside Japan rose 0.7%
LONDON/SYDNEY – World stocks traded higher and bonds and currencies steadied on Wednesday, largely unfazed by ratings agency Fitch downgrading its China outlook, while traders awaited crucial U.S. inflation data due later in the day.
Europe’s broad STOXX 600 index rose 0.6% recovering after a drop the day before and heading back towards a record high, while MSCI’s broadest index of Asia-Pacific shares outside Japan rose 0.7%.
Resilient economic data, particularly in the United States, matched with expectations that central banks will be cutting rates this year, have boosted stocks in most markets around the world.
But fears that sticky inflation in the United States means the Federal Reserve won’t be cutting rates till later in the year remains a risk.
Wednesday’s U.S. CPI data for March, due at 12:30 GMT, will therefore be crucial. Market pricing now reflects roughly a 50% chance the first Fed rate cut will come in June, lower than a few weeks ago.
“Markets seem poised for an inflation figure that may exceed expectations as odds of a June cut have decreased. Importantly, speakers for the Fed have often highlighted that two lower inflation prints are required for them to become confident that interest rate cuts are justified,” said Julien Lafargue, chief market strategist at Barclays Private Bank.
He added there were still two more monthly releases of CPI and the Fed’s favoured PCE inflation data to come before the central bank’s June meeting.
U.S. Treasuries were fairly quiet ahead of that data, with the benchmark 10 year yield flat on the day at 4.366%, not too far from the four-month high of 4.464% hit Monday.
Euro zone bonds were also steady, ahead of Thursday’s European Central Bank meeting, with Germany’s 10 year Bund yield around one basis point lower on the day at 2.35%.
European rates have largely traded in line with U.S. peers in recent months, but a strong U.S. inflation print, followed by more hints that the ECB could cut rates in June, as expected, might see them diverge.
Eyes in Europe were on defence stocks as well, which were down 0.9% after tumbling 3.8% the day before as traders grew nervous about the sector’s record-breaking run and analysts pointed to potentially stretched valuations.
CHINA OUTLOOK
Also drawing attention on Wednesday was Fitch affirming China’s sovereign rating at ‘A+’ though the outlook was downgraded to negative and it forecast economic growth this year would slow.
Chinese onshore blue chips dropped 0.8%, but Hong Kong’s Hang Seng index rose 1.85%.
“These downgrades reflect mostly the current cyclical situation in China, they are not forward looking. This means that as and when China’s economy improves, they will change their rating outlook to positive,” said Chi Lo, BNP Paribas Asset Management senior strategist. He added the Fitch move followed a similar call by Moody’s in December.
In currency markets, the Japanese yen continued to attract much of the attention, pinned just on the strong side of the 152 per dollar level. Traders fear intervention from Japanese authorities to support the currency, should it break too far or too quickly past that level.
Even if Tokyo does intervene, the yen strength could be short-lived thanks to the wide gap between rock bottom interest rates in Japan and those elsewhere.
“The Bank of Japan will be taking very small steps at a time when a lot of global central banks are contemplating cutting rates (meaning) any yen moves higher will be limited,” said Marcella Chow, global market strategist at JPMorgan Asset Management.
Elsewhere in currency markets, the dollar index, which tracks the unit against six main peers, was flat at 104.09 having poked its head above 105 in early April before retreating.
U.S. crude was up 0.2% at $85.4 a barrel. Brent crude rose 0.4% to $89.79 per barrel.
Gold was slightly higher. Spot gold traded at $2,352.93 per ounce hovering around all time highs.
Source: Zawya
