News

By Lawrence White

LONDON/NEW YORK (Reuters) -Shares rose and bonds rallied worldwide on Wednesday as investors tiptoed into the new year with tentative optimism after a brutal 2022, looking to encouraging inflation data for hope that rate hikes might be less aggressive than feared.

The MSCI All-World index jumped 1.08%, helped by a 1.1% gain in the U.S. S&P 500. The Dow Jones Industrial Average rose 0.63%, and the Nasdaq Composite climbed 1.1%.

Analysts said that hopes that U.S. interest rates could peak in the first quarter underpinned equity markets, and might help boost stocks in the coming months.

"While we envision more choppiness in markets in the first quarter, we see markets settling into a slow grind higher after that," said Art Hogan, chief market strategist at Briley Wealth.

Investor optimism about an imminent peaking in interest rates helped them to look past data released on Wednesday that showed U.S. job openings falling less than expected on the last day of November. The data indicated a still-tight labour market, and could give the Fed cover to keep rates higher for longer.

The pan-European STOXX 600 jumped 1.4% as a lower inflation reading from France boosted sentiment, building on positive data from Germany earlier in the week.

Euro zone government bonds likewise extended their rally from the first two trading days of 2023, with the benchmark German 10 year yield sliding around 10 basis points on signs central banks are making progress against inflation.

The yield on 10-year Treasury notes fell to 3.696%, and 2-year Treasury yields, which typically move in step with interest rate expectations, slipped to 4.3575%.

MSCI's broadest index of Asia-Pacific shares outside Japan jumped 1.8% in its third straight day of gains for the year, having fallen 20% in 2022, its worst performance since 2008.

The modest recovery in stocks and bonds showed optimism about two of the factors that made 2022 such a hellish year for investors, namely the constant drumbeat of rate hikes to fight inflation and China's economy-throttling anti-COVID measures.

But jitters in other assets showed the path ahead will be far from smooth, as policymakers try to balance encouraging economic growth with keeping a lid on inflation.

Oil prices fell sharply, as concerns about global demand persisted amid signs of weakening activity in the main engines of growth such as the United States, Europe and China.

"Fresh warnings about the effect of aggressive rate hikes on the U.S. economy are rattling traders again, with the oil price continuing its march downwards," said Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown.

U.S. crude fell 4.7% to $73.39 per barrel, while Brent was at $78.32, down 4.6% on the day. [O/R]

FED UP

The positive market momentum in stocks on Wednesday was a prelude to a key data release that could shift momentum back the other way.

Minutes from the U.S. Federal Reserve's December meeting, when it cautioned rates may need to stay higher for longer, are due to be released at 1900 GMT.

"The market has made a pretty tentative start to the year ... (and) is still grappling with the notion of what we are going to see from the Fed this year," said Rob Carnell, head of ING's Asia-Pacific research.

"There are two camps out there and they are wrestling for dominance in terms of the view. Some days higher-for-longer wins, some days (the) higher-then-lower camp wins," Carnell said.

The U.S. central bank said last month when it raised interest rates by 50 basis points that the terminal rate may need to remain higher for longer to fight inflation.

Markets, however, are pricing in rate cuts for late 2023, with fed fund futures implying a range of 4.25% to 4.5% by December.

Hopes for less aggressive rate hikes boosted non-yielding gold, with spot prices for the precious metal hitting $1,857 per ounce by 1148 GMT, their highest since mid-June. [GOL/]

The dollar index, which measures the greenback against six other currencies, meanwhile, fell 0.6% as commodities currencies like the Australian dollar gained and the euro rose on the positive French and German inflation data. [USD/]

Sterling was last trading at $1.2056, up 0.7%, while the euro rose 0.65% to $1.06190, coming off a three-week low of $1.0519 touched overnight.

The Japanese yen softened against the dollar at 131.990 per dollar.