Shares subdued as investors flip-flop on rate rises

LONDON (Reuters) – World shares struggled to extend a bounce off four-week lows on Tuesday, oil prices were at their highest in well over two years, and indecisive bond markets flip-flopped on inflation and interest-rate moves.

Europe’s STOXX 600 had given back its early gains as falls in technology and healthcare stocks – the main winners from the COVID pandemic – offset a modestly higher UK FTSE with its army of oil and mining firms.

Wall Street’s open also appeared to be subdued after a jump on Monday, and government bond prices were choppy as fixed-income investors continued to adjust to last week’s US Federal Reserve shift, when policy-makers pulled forward rate-hike forecasts.

Fed Chairman Jerome Powell was to appear before the US Congress on Tuesday, and investors were starting to square up positions ahead of the start of the second half of the year next week.

“I’m not sure anyone really knows what this move by the Fed really means at the moment,” said CMC Markets senior strategist Michael Hewson. “I’m not sure it’s changed a damn thing. The Fed is going to taper its purchases... it’s just about finessing that message.”

It was not affecting oil markets. Brent crude prices hit $75 a barrel for the first time since April 2019. Traders remained bullish about a quick recovery in global oil demand as economies reopen.

Brent drifted back slightly in London but had gained 1.9% the previous day, when US WTI crude jumped 2.8%. Both benchmarks are up nearly 50% this year and have now risen for the past four weeks on optimism over the pace of global COVID-19 vaccinations and an expected pickup in summer travel.

MSCI’s broadest index of Asia shares advanced 0.8% overnight, moving above Monday’s four-week lows and notching a 4% gain so far this year.

Japan’s Nikkei led the way and rallied 3.1% as shipping firms soared 10% to a 10-year high. South Korea stocks rose 0.7%, Australia’s advanced 1.6%, and Chinese shares closed up 0.8%.

“The reopening trade is still something we are looking for in the second half of the year,” said Eric Theoret, global macro strategist at Manulife Investment Management. Europe would see the most benefit, followed by emerging markets, he said.

In currency markets, the dollar was edging higher again after gaining sharply last week in the wake of the Fed’s policy surprise.

Against the euro, the greenback was through $1.19 per dollar again at $1.1894. It climbed to 110.49 yen, and the dollar index was up 0.15% to 92.072 after giving up about 0.5% on Monday.

“The whole world was mega-short the US dollar, and that in good part has probably been cleaned out already, and now we take a wee breath before the next move up,” said Westpac currency analyst Imre Speizer.

Bitcoin stabilized in Asian and European trading and was last at $31,575. It has nearly halved in value over the last three months. Bitcoin and other cryptocurrencies had come in for heavy selling on Monday, hurt by a tightening crackdown on trading and mining in China.

In the bond markets, benchmark 10-year US Treasury notes were yielding 1.50% again, having sunk to around 1.36% at one point on Monday.

Adding to all the debate on inflation and rates, European Central Bank sources told Reuters its policy-makers remained some way apart on a new inflation strategy – the definition of price stability and how to achieve it – after a meeting over the weekend.

Spot gold added 0.3% to $1,787.61 an ounce, and copper steadied at $9,192 a ton, having dropped nearly 15% over the last six weeks. It is still up more than double where it was during the first peak of COVID concern early last year.