Shares charge higher after Fed hike, dollar licks wounds

Global equity markets were still on the charge on Thursday on relief that the biggest hike in U.S. interest rates in more than two decades hadnt been even sharper.

London, Paris and Frankfurt were up between 1.3% and 2% in early European trading amid collective cheers at Wednesdays 50 basis point Federal Reserve rate hike and its accompanying signals that 75 bps moves were now unlikely.

It kept European government bond yields largely in check ahead of what is expected to be the Bank of England‘s fourth hike since December, while oil steadied after the European Union’s plan to ban Russian oil imports had triggered a near 5% spike.

“The fact (Fed Chair) Powell removed the 75 basis point hike from the table, I think that is what the markets are reacting too, it is a bit of a relief rally,” BlackRocks EMEA Head of Investment Strategy for its iShares unit, Karim Chedid, said.

“Inflation data is all important now and if it flattens off as the Fed is expecting then the markets will be ok with that.”

In currency markets, the dollar was gradually regaining its footing after the Feds move had caused its biggest drop in nearly two months. It is up more than 7% so far this year, on track for its biggest annual gains since 2015.

It meant sterling was being shuffled back to $1.2548 ahead of the BoE where traders have fully priced a 25 basis-point rate hike later. The euro was back at $1.05.

The main action was centred on the equity markets, though.

Wall Street bulls had seen the Dow Jones Industrial Average jump 2.8%, the S&P 500 gain 3% and Nasdaq finish 3.1% higher and futures prices pointed to little giveback expected later.

MSCIs broadest index of Asia-Pacific shares outside Japan had risen 0.8% earlier, although trading had been thin with both Japanese and Korean markets closed for public holidays.

Marcella Chow, Hong Kong-based global market strategist at J.P. Morgan Asset Management, said the Federal Reserves rate rise was in line with expectations, hence removing some investor concerns about a more aggressive move.

The half a percentage point rate increase was the biggest jump in 22 years. Fed Chair Jerome Powell said policymakers were ready to approve similar-sized rate hikes at upcoming policy meetings in June and July.

Crucially for many investors, though, he also said it was not “actively considering” a 75 basis-point rate hike, tempering fears something of that magnitude could be on the cards with inflation now running so hot

“Given the Asian market has more certainty right now, I think this will probably also cause the market to rally a bit as well,” Chow said.

FRAGILE CHINA

Chinas shares had also recovered ground in their session, gaining 0.25% as mainland markets resumed trade after a three-day holiday.

Investors also cheered a pledge by Chinas central bank for more monetary policy support to help businesses badly hit by the latest COVID-19 outbreak.

J.P. Morgans Chow added she expects the market to make further gains with other high level Chinese officials also pledging support.

Gold was up 1% at $1,901.50 per ounce after rising to its highest since April 29 in Asia.

U.S. crude futures gained 0.3% to $108.21 a barrel and Brent steadied at $110.25. Both benchmarks rose over $5 a barrel on Wednesday.