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Tags: Financial Markets | Infrastructure | Money | Federal Reserve Chairman Jerome Powell | tapering | quantitative easing | inflation

Tantrum-Free Fed Taper Drives Up Stocks, BoE Holds Off on Rate Hike

Korean trader
Korea Stock Exchange trader. (AP)

Thursday, 04 November 2021 09:46 AM

World stocks hit record highs on Thursday after a smooth start to the U.S. Federal Reserve's stimulus wind-down plan, though the Bank of England was the latest to be accused of communication problems after it held off raising interest rates.

European stocks held their own highs while the pound tumbled nearly 1% after the BoE decision, which had been hotly anticipated given it would have been the first big central bank to hike had it done so since COVID-19 struck.

Britain's bond markets also cheered the news as Wall Street traders prepared for more gains there after another dip in jobless claims figures.

"They [BoE policymakers] have a big communication challenge, full stop," said the head of Janus Henderson's multi-asset team Paul O'Connor.

"The question is why has the governor [Andrew Bailey] sounded so hawkish over the last couple of months... In speech after speech he has clearly nudged market expectations [for a rate hike] higher so they have a responsibility to articulate clearly how they prioritize the policy objectives."

Fed Message Calms OPEC+ as Well

Oil was also on the rise again as OPEC+ held its latest meeting, while there was a general drop in volatility on relief that the Federal Reserve hadn't pulled any surprises on Wednesday when laying out plans to scale down its stimulus.

"We are constructive in the short-term," said SEB investment management's global head of asset allocation Hans Peterson, encouraged that neither the Fed nor the European Central Bank were racing to raise rates at the moment.

"We still think rates are so low that equities continue to have the upper hand."

The BoE had been in a tricky position. It faces the challenge of rising inflation, which is set to more than double its 2% target this year. At the same time, though, it will squeeze household spending as the government scales back stimulus aid, including its job support scheme, raises taxes and Britain's economy grapples with post-Brexit trade frictions and another wave of COVID-19 cases.

Only two of the BoE's rate setters voted for an immediate 15 basis-point rate hike, although it kept alive the prospect of one saying it would probably have to raise the Bank Rate from its all-time low of 0.1% "over coming months" if the economy performed as expected.

For now though, equity investors were just content that the major world money printers remain in no rush to remove the policy punch bowl.

The pan-European STOXX 600's was last up 0.5%, which also helped MSCI's 50-country world index hit its third straight record high too. The overall value of world stocks is now double what it was at the depths of the COVID-induced slump last year.

Jobless Claims at Pandemic Low

For Wall Street watchers, weekly jobless claims figures which prelude Friday's big payrolls data, fell to a fresh 19-month low last week, suggesting the economy was regaining momentum again.

Nasdaq futures rose 0.2% to another record high, which if sustained, it would be the ninth straight session of gains.

In Asia overnight, Japan's Nikkei climbed 0.9% and touched its highest in a month, while MSCI's broadest index of Asia-Pacific shares outside Japan crept up 0.4%.

The Asian index has been burdened by a spike in new coronavirus cases in China, which threatens to curb consumer spending in an already slowing economy also hampered by property market strains.

Strong readings on U.S. services and employment underpinned the better mood, elsewhere.

As expected, the Fed announced it would trim its bond buying by $15 billion a month from this month, while leaving open the option to quicken or slow the pace as needed.

Fed Chair Jerome Powell did sound slightly less sure inflationary forces would prove to be fleeting, enough to hit longer-term bonds and "bear steepen" the yield curve.

"Overall, we didn't get anything that should imply higher market pricing of hikes than what we have now," said Jan Nevruzi, an analyst at NatWest Markets.

Fed futures imply a first increase to 0.25% by June with another to 0.5% by the end of 2022..

"While not an ultra-dovish meeting, the result was still a far cry from some of the more stunning hawkish surprises seen recently from the likes of the Bank of Canada," added Nevruzi.

The Canadian and Australian central banks have caused turmoil in their bond markets in the last couple of weeks by abruptly changing tack on policy.

Poland's central bank surprised with an aggressive hike on Wednesday too and the Czech Republic is expected to raise its rates again later, heightening a mass trend of rate rises in emerging markets already this year.

The BoE wrogfooting though had already shoved sterling down more than 1% to $1.3540, having been hovering around $1.3630 beforehand.

The dollar meanwhile climbed 0.45% to 94.285 as speculators consolidated long positions, following 5-months of steady gains. It firmed on the yen to 114.05, aiming for the recent top of 114.69.

The euro pared overnight gains to $1.1550, hampered by expectations the European Central Bank will trail the Fed in tightening by some margin.

Long-dated euro zone bond yields had been nudging higher earlier by dipped with the BoE gyrations. British 10-year borrowing costs, which have doubled since mid-August, tumbled 9 basis points which left them just below 1% again.

In commodities, the dip in bond yields saw gold dither around $1,774 an ounce.

Oil prices were on for their biggest rise of the month so far though as expectations mounted that OPEC+ would ignore pressure to ramp up production at a meeting later and stick to its current path.

© 2022 Thomson/Reuters. All rights reserved.

World stocks hit record highs on Thursday after a smooth start to the U.S. Federal Reserve's stimulus wind-down plan, though the Bank of England was the latest to be accused of communication problems after it held off raising interest rates.
Federal Reserve Chairman Jerome Powell, tapering, quantitative easing, inflation
Thursday, 04 November 2021 09:46 AM
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