Stocks, bonds in euphoric mood, oil subdued after sharp fall

By Dhara Ranasinghe and Wayne Cole

LONDON (Reuters) -World stocks held near two-month peaks on Friday, while oil prices were set for a fourth week of declines in a boost for the inflation outlook and government bond markets that are increasingly confident interest rate cuts are coming next year.

MSCI’s World Stock Index was steady near highs hit earlier this week, while European shares opened higher and U.S. stock futures pointed to a positive open on Wall Street later.

Oil prices found more stable ground after sliding almost 5% on Thursday to four-month lows in a move that was blamed on economic and supply concerns, though technical selling likely played a part when the $80 bulwark broke. [O/R]

was last up 0.3% at $77.64 a barrel, but still down around 20% from the $97.69 top hit in late September, while edged up 0.3% to $73.11.

Whatever the cause, the rout should put added downward pressure on global inflation and reinforce expectations of policy easing next year.

In Europe, rate-sensitive two-year bond yields in Germany and Britain fell to their lowest levels since June with money markets now pricing in roughly 100 basis points worth of rate cuts in the United States and the euro area.

A softer tone to U.S. economic data this week has fuelled rate-cuts bets, pushing Treasury yields down and lifting equity markets.

November so far has seen one of the strongest performances for stock markets this year, with MSCI’s world stock index and the over 7% higher each.

“We’re still in this environment where we are late cycle and flirting with the idea of whether we go into a recession or not,” said Justin Onuekwusi, chief investment officer at investment firm St James’s Place.

“This is the key reason why central bank expectations have become a key driver to risk and right now it’s hard to look beyond near-term.”

Two-year Treasuries yields are down 23 basis points for the week at 4.83%. That means they are set for their best weekly performance since March.

Ten-year note yields stood at 4.43%, having fallen 19 bps for the week so far, a sharp drop from the 5.02% high hit just a month ago.

Corporate bond spreads have also tightened sharply this week in another sign that risk appetite has picked up.

“The most striking number this week was the (U.S.) CPI, which was a bit lower than consensus and led to some euphoria in bond markets,” said Christian Hantel, a portfolio manager at Vontobel Fixed Income Boutique.

“That tells you two things. One that in terms of inflation, we continue to move in the right direction and second, that there had been some doubts in markets on the topic of a soft landing so as more data confirmed that view, there was a strong move.”

Data on Tuesday showed U.S. consumer prices were unchanged in October, and the annual rise in underlying inflation was the smallest in two years.

Adding to the disinflationary theme was commentary from Walmart (NYSE:) executives that costs were “more in check” and they were planning on cutting prices for the holiday season.

UPBEAT

Asia-Pacific shares outside Japan eased 0.67% from a two-month high, but were still up 2.7% for the week.

closed up 0.48%, to be around 3% firmer for the week, helped by reassurance from the Bank of Japan that it was sticking with its super loose policy.

Chinese blue chips were 0.12% lower, having missed on the general rally so far this week. Alibaba (NYSE:) Group’s Hong Kong shares slumped 10% after it scrapped plans to spin off its cloud business.

Sentiment in Asia had been supported by the apparent easing of tensions between the United States and China, with the Chinese press lauding the meeting between President Xi Jinping and President Joe Biden.

In FX markets, the sea change in market pricing for the Fed weighed on the dollar, with the US currency down 0.75% at 149.57 yen.

The euro was steady at $1.0853 and sterling trimmed earlier falls and was just a touch softer on the day at $1.2396.

Gold nudged up to $1,980 an ounce, about 0.45% firmer on the day. [GOL/]

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