Markets extend rally on Fed rate optimism
Asian stocks extended a global rally on Thursday and the dollar sank after Federal Reserve (Fed) Chairman Jerome Powell flagged a rate hike slowdown and China signaled a softer approach to fighting Covid.
A growing sense of hope that months of sharp monetary tightening around the world is finally reining inflation back from its decades-long highs sent equities surging in November, even as policymakers warned that more work had to be done.
And in a much-anticipated speech on Wednesday, Powell said the full effects of the Fed’s belt-tightening was yet to be felt, but that it “makes sense to moderate the pace of our rate increases as we approach the level of restraint that will be sufficient to bring inflation down.”
He signaled that the United States central bank’s December gathering was likely to see officials lift borrowing costs by 50 basis points, having pushed them up by a bumper 75 points at the past four meetings.
However, Powell did say the policy would need to remain tight “for some time” to restore price stability, echoing comments from other Fed officials who suggested there might not be any rate cut until 2024.
Analysts said the reaction to Powell’s remarks — which had been expected to be his most dovish in some time — highlighted a sense of relief among investors that a long-hoped-for pivot was on the cards.
All three main indexes on Wall Street surged, with the Nasdaq leading the way as rate-sensitive tech firms rocketed.
The gains extended November’s rally and helped claw back more of the hefty losses suffered for much of 2022.
Investors were “putting those nasty thoughts of a bear market to bed as the December Santa Rally springs alive,” Stephen Innes of SPI Asset Management said. “Indeed, investors are reveling in the afterglow of moderating Fed signals. And with the Fed done with jumbo hikes, it’s seemingly enough to mark the bottom in the bear market and could lead to a sustainable rally.”
He added that bets on rates topping 5 percent were fading and the advance in markets could push into the new year, with another slowdown in November inflation potentially fueling a bull rally, when a market rises 20 percent from its recent low.
“Still,” he warned, “inflation will need to play along.”
China Covid hope
In another sign of hope, data earlier showed that eurozone inflation eased for the first time in 17 months in November.
Hong Kong extended its rally into a third day, with tech giants, including Alibaba and Tencent, tracking massive gains in their US-listed stock, while Shanghai was also up.
Those rallies were also helped by signs that China is edging toward a more pragmatic approach to fighting the coronavirus, having hammered the economy this year with its strict “zero-Covid” strategy of lockdowns and mass testing.
After widespread unrest against the measures — and calls for more political freedoms — authorities have announced moves aimed at loosening some restrictions.
On Wednesday, Vice Premier Sun Chunlan, who heads China’s Covid campaign, told the National Health Commission that the fight was entering a new phase as the coronavirus’ Omicron variant weakens and more people are vaccinated.
Bloomberg News also noted that she did not refer to “dynamic zero-Covid,” the term used to explain Beijing’s strategy.
“While we shouldn’t expect a dramatic shift in policy from the leadership, particularly before the March Congress, any modest softening in its zero-Covid policy will and should be welcomed,” Oanda’s Craig Erlam said.
“The approach has been extremely damaging to growth and confidence and the protests highlight how public opinion toward it is changing,” he added.
Among other markets, Tokyo, Sydney and Taipei added more than 1 percent while Singapore, Seoul, Wellington, Mumbai and Bangkok were also in positive territory.
London, Paris and Frankfurt rose at the open.
The dollar suffered another selloff, tanking more than 1 percent to briefly hit as low as 135.84 yen on Thursday — a level not seen since August.
The greenback’s losses come after it soared across the board this year as Fed monetary policy diverged more and more from other central banks.