Stocks Rise, Dollar Falls as Investors Hold on to China COVID Optimism

Stocks Rise, Dollar Falls as Investors Hold on to China COVID Optimism

By Amanda Cooper

LONDON (Reuters) – Global stocks rose on Monday, despite Beijing denying it would consider relaxing its zero COVID-19 policy, which halted safe-haven flows into the dollar ahead of potentially crucial consumer inflation data this week. week.

Risk assets rallied on Friday on speculation that China was preparing to relax its pandemic restrictions, but over the weekend health officials reiterated their commitment to a “dynamic cleaning” approach to COVID cases. as soon as they arise.

“We can question whether there is any truth to the China story, but the market is quite happy to give it credence at the moment, despite the big negatives,” said Jeremy Stretch, head of G10 FX strategy at CIBC Capital Markets.

By midday in Europe, the dollar was down for a second day as traders clung to the idea that China could ease some of its restrictions, after the government signaled on Monday it would make it easier for people to enter and leave the country. . capital.

The dollar weakened against other major currencies, lifting the pound 0.6% to $1.1445 and the euro 0.2% to near parity at $0.9980.

The biggest macroeconomic event risk this week will be the consumer price index (CPI) for October, which could be instrumental in setting investors’ expectations about the likely course of the Federal Reserve’s monetary policy.

Fed Chairman Jerome Powell quashed speculation last week that the central bank might slow its rate hikes, saying interest rates would likely stay higher for longer.

On Friday, the October jobs report showed much faster-than-expected job growth, but slower wage growth and a rise in the unemployment rate, suggesting some of the tightness in the labor market may be easing. .

MEDIUM FORECASTS

For Thursday, the median forecasts are for annual CPI inflation to slow to 8.0% and core inflation to ease a bit to 6.5%.

“If we can see a moderation in the core CPI, I think that might be a bit to imply that, but I think if we see that it will encourage this correction to go a little bit further,” CIBC’s Stretch said.

In the stock market, travel and leisure stocks, led by online betting group Flutter Entertainment and budget airline Ryanair, were among the biggest gainers. The STOXX 600 rose 0.6%, while the export-sensitive DAX rose 0.9%.

The MSCI All-World Index gained 0.5%, buoyed by overnight strength in Asian markets, with Shanghai’s CSI 300 ending 0.2% higher and Hong Kong’s Hang Seng gaining 2%. .75%, after last week’s 8.7% gain.

The offshore yuan fell 0.8% to 7.2310, but still remained near its strongest against the dollar in about a week.

Speculation that China, the world’s biggest commodity consumer, might open its economy sent copper up 7% on Friday in its biggest one-day rally since 2009, while oil rose more than 4%.[MET/L] [O/R]

S&P 500 and Nasdaq futures extended gains, both rising 0.6%.

Four Federal Reserve lawmakers indicated Friday they would still consider a smaller interest rate hike at their next policy meeting, sounding less aggressive than Chairman Jerome Powell.

There are at least seven Fed officials scheduled to speak this week, which will help refine the outlook for rates as markets now lean narrowly toward a half-point rate hike next month to 4.25- 4.5%.

“I don’t think the market will do much ahead of the US inflation data,” said Massimiliano Maxia, senior fixed income specialist at Allianz Global Investors.

“Markets are expecting a 50 bps (Fed) rate hike in December and 25 bps early next year, but are ready to change their view fairly quickly if consumer price numbers surprise to the upside,” he added.

Two-year Treasury yields, the best responsive to expectations around inflation and interest rates, last rose 3 basis points on the day to 4.686%, from a high on Friday 2007.

Also of note is Tuesday’s US midterm elections, in which Republicans could gain control of one or both chambers and lead to an impasse on fiscal policy.

Meanwhile, oil eased, giving up some of last week’s gains. Brent crude fell 0.3% to $98.25 a barrel, while US crude fell 0.4% to $92.25 a barrel.

(Additional reporting by Stefano Rebaudo in Milan and Wayne Cole in Sydney; Editing by Daniel Wallis, Shri Navaratnam and Ed Osmond)

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