World shares have risen as investor appetite for risky assets got a boost from soft US inflation numbers, helping soothe worries that the Federal Reserve might step up the pace of its rate hikes.
The MSCI All Country World Index, which tracks shares in 47 countries, was up 0.3 per cent and was set for its best week since March 9. The dollar was flat against a basket of currencies.
Oil prices eased from multi-year highs hit this week on hopes that alternative supplies could replace a looming drop in Iranian exports due to sanctions that Washington plans to re-introduce after abandoning a global deal on limiting Iran’s nuclear ambitions.
Thursday’s soft US inflation numbers followed employment data last week that pointed to sluggish wage growth.
While the rally in stocks seemed to point to investor relief, analysts were split over whether the slowdown in inflation could lower the chances of the Fed increasing the number of rate hikes it has suggested will take place this year. Federal Reserve Bank of St. Louis’ James Bullard will make a speech on Friday, as will European Central Bank President Mario Draghi.
Konstantinos Anthis, head of Research at ADS Securities, said the case for two or three further US rate hikes could be decided after the summer. Fed funds futures show a 93 per cent chance of one next month.
‘The data from the US for the past few months has been supportive so if this trend is to continue there’s plenty of time for the Fed to witness stronger performance again and grow more aggressive,’ Anthis said.
Softer inflation numbers also flattened the US Treasury yield curve further, with the gap between 5- and 30-year bonds at its narrowest since 2007. Investors also bought up southern European government bonds, taking advantage of a rise in yields on the back of Italian political concerns.
Italian, Spanish and Portuguese 10-year borrowing costs fell 2-3 basis points, outpacing better-rated peers at the end of a week in which the increasing likelihood of an anti-establishment coalition taking power in Italy had hurt the euro zone’s lower-rated debt.
Italian 10-year yields were set for their biggest weekly rise since February.
European stocks, meanwhile, were set to seal their longest winning streak in over three years as fresh deal-making stole the spotlight from the tail-end of a busy earnings season.
The pan-European STOXX 600 was flat, but set for its seventh straight week of gains – its longest winning streak since March 2015. Germany’s DAX was down 0.1 per cent and Britain’s FTSE 100 was flat.
Asian markets were cheered by a further easing in tensions on the Korean Peninsula, after US President Donald Trump said he would meet North Korean leader Kim Jong Un in Singapore on June 12 for talks on Pyongyang’s nuclear weapons program.
MSCI’s broadest index of Asia-Pacific shares outside Japan . rose 0.7 per cent to near three-week highs with broad-based gains across all sectors. Japan’s Nikkei climbed 1.2 per cent.
While North Korea has come off the boil for now, political concerns are focused elsewhere as the United States and China continue skirmishing over trade and tensions rise in the Middle East.
‘Trump still needs President Xi (Jinping) and China’s support in dealing with North Korea and this will be his priority in the short term,’ economists at JPMorgan wrote in a note to clients.
‘Once the meeting is finished, trade may return to the fore.’
US and Chinese officials will meet in Washington for a second round of trade talks next week, after apparently making little progress in discussions in Beijing earlier this month.
In currency markets, the pound traded at $US1.3528, inching above a four-month low of $US1.3457 touched on Thursday after the Bank of England held interest rates.
In commodities markets, spot gold rose 0.1 per cent to $US1,322.61 an ounce.
US crude futures CLc1 were down 0.1 per cent at $US71.3 a barrel. Brent crude futures fell 0.3 per cent to $US77.26 a barrel.