LONDON, UK – Stock markets and oil prices rallied Friday, with investors largely pricing in more interest rate hikes aimed at taming runaway inflation.
The dollar slid one percent versus the pound and euro after recent hefty gains.
London’s stock market jumped more than 1.5 percent in morning deals, mirroring advances in Paris and Frankfurt, while the British capital’s exchange mourned the death of Queen Elizabeth II.
“Our sympathies and condolences are with The Royal Family,” the London Stock Exchange said in a message posted on its website.
The LSE is expected to shut on the day of the queen’s funeral following her death on Thursday.
“Markets are being very British about the whole thing, carrying on in a fashion that I suspect she would have approved of,” said IG analyst Chris Beauchamp.
Dollar off highs
The more confident mood across equity and oil markets was reflected in a cooler dollar, which had surged to multi-decade highs against major peers in recent weeks owing to the Federal Reserve’s hawkish tilt to tighter monetary policy.
The greenback’s softness came even after Federal Reserve chief Jerome Powell reasserted the US central bank’s determination to keep hiking interest rates to fight prices, even at the cost of economic growth.
His warning that “we need to act now forthrightly, strongly” followed comments from his deputy Lael Brainard, who said policymakers would lift borrowing costs for as long as it takes to bring inflation down from 40-year highs.
Still, Wall Street ended in positive territory Thursday, putting markets on course for a weekly gain and easing some pressure after hefty losses in August caused by worries that rising rates would spark a recession.
New York’s rise filtered through to Asia, where Hong Kong rose close to three percent heading into a long weekend.
Edward Moya, analyst at trading platform OANDA, said traders cheered as “Powell stuck to his hawkish script and affirmed the commitment to tighten policy until inflation is back towards their target.
“Wall Street is expecting to see some pricing pressure relief with next week’s inflation report, but that shouldn’t derail the current 75 basis-point pace of tightening.”
There was also some cheer from news that inflation in China had eased slightly in August, giving the government more room to introduce more economy-supporting measures, though the recovery remains hostage to leaders’ strict zero-Covid strategy of growth-sapping lockdowns.
The euro was holding well above parity with the dollar, one day after the European Central Bank announced its own 75 basis-point rise as it warned inflation was “far too high” and likely to stay above target for “an extended period”.
ECB chief Christine Lagarde suggested policy would continue to be tightened for some time.
The yen strengthened as officials began speaking up after the unit approached a 32-year low versus the greenback.
The pick-up came after Bank of Japan chief Haruhiko Kuroda met Prime Minister Fumio Kishida on Friday before saying “the rapid weakening of the yen is undesirable”.
The talks were used as a sign of intent to act in support of the currency if it continued to weaken.