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Global stocks ease after Fed officials downplay optimism

LONDON, Jan 10 (Reuters) – Global stocks edged lower on Tuesday as investors took profits on gains over the past two weeks after comments from two Federal Reserve officials struck a note of caution on the U.S. rate outlook, knocking stocks, commodities and other asset risks.

The MSCI All-World Index (.MIVD00000PUS) slipped 0.1% but remained within sight of Monday’s three-week high, while the dollar – a gauge of investors’ appetite for risk – remained flat against a basket of major currencies.

In the past six weeks, even as cases have surged across the country, China has lifted its zero-pandemic policy for COVID-19, giving markets a bumpy ride as investors weighed the economic benefits of reopening against the impact on infection wave activity.

Added to this is a sense of optimism that inflation has peaked, particularly in the United States, and, as such, the Fed will not need to raise rates as much as many feared.

But with consumer price pressures still well above the central bank’s 2% target, two Fed officials issued a stark reminder on Monday that interest rates will have to rise regardless of what investors priced in. .

“The market is trying to stay one step ahead of the Fed, but it’s not really listening to what it’s saying. And the Fed is very clear with its message – that rates are going to rise and they’re going to stay higher for longer,” said CityIndex strategist Fiona Cincotta.

“If we look at inflation expectations later this week — the big focus — core inflation is expected to remain high. It doesn’t matter which way you look at it. It’s still higher than the Fed’s target,” she said.

Consumer price data, due on Thursday, is expected to show that headline inflation slowed to 6.5% in December from 7.1% in November.

The data could be key in setting expectations for what will happen to rates at the Fed’s next meeting and beyond.

San Francisco Fed President Mary Daly told the Wall Street Journal that she would be paying close attention to Thursday’s data and that 25 and 50 basis point hikes were options for her. Atlanta Fed President Raphael Bostic said his “core case” is not for a rate cut this year or next.

“The main theme overnight was equity caution as stocks pared gains after hawkish comments from two Fed officials.” Raphael Bostic and Marie Daly said the Fed is likely to raise (interest rates) to above 5% and keep them there for some time,” Commerzbank said in a note.

Fed Chairman Jerome Powell speaks at a conference on central bank independence later Tuesday, and investors are likely to scan his remarks for any signal on monetary policy.

FRAGILE CHINA

In Europe, stocks opened lower, with the STOXX 600 (.STOXX) hitting an eight-month high on Monday, up 0.7%. London’s FTSE 100 (.FTSE) lost 0.3%, while Frankfurt’s DAX (.GDAXI) fell 0.5%.

U.S. stock index futures fell 0.1%, suggesting Wall Street may open slightly lower.

The greenback made gains against the Australian dollar, which is highly sensitive to the Chinese economy and has gained 3.5% in the past three weeks alone, on optimism about the reopening.

The Aussie was last down 0.2% at $0.6903, while the offshore yuan lost 0.1% against the dollar to trade around 6.7906. It reached its strongest level since mid-August the previous day.

The dollar index weakened by 0.21%. The euro rose by 0.1%, while the pound weakened by 0.1%. The yen rose 0.1% against the dollar to 132.04, after data showed a faster rise in inflation in Tokyo that could prompt the Bank of Japan to tighten monetary policy more quickly.

Strategists at BlackRock, the world’s largest asset manager, said on Tuesday they expect China’s economy to grow 6% this year, which should ease a global slowdown as recession hits advanced market economies. But any rejection can be fleeting.

“We do not expect the level of economic activity in China to return to its pre-Covid trend, even as domestic activity restarts.” We see growth returning once the restart runs its course,” Wei Li, who is chief global investment strategist for BlackRock Investment Institute, wrote in a note.

Copper bounced back from six-month highs as buoyancy over China’s recovery from COVID-19 was offset by concerns over the risk of a wider global downturn.

Copper futures on the London Metal Exchange fell 0.9% to $8,785 a tonne, hitting a six-month high on Monday, while aluminum and zinc fell between 1-1.4%.

Oil has been under pressure on concerns that China’s resumption of more normal activity may not lead to a boom in demand.

“The social vitality of China’s major cities is recovering quickly, and the resurgence of Chinese demand is something to look forward to.” However, given that the consumption recovery is still in the expected phase, the price of oil is likely to remain low and fluctuate. bound,” said analysts at Haitong Futures.

Brent crude futures were last down 0.6% at $79.16 a barrel. The price of oil is about 2.3% below a year ago and 45% below a peak of around $139 after Russia invaded Ukraine last February.

Additional reporting by Selena Li in Hong Kong; Editing by Muralikumar Anantharaman and Angus MacSwan

Our Standards: Thomson Reuters Trust Principles.

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