The pound has rallied on speculation Prime Minister Liz Truss will perform another u-turn following the uproar caused by her government's controversial debt-fuelled mini-budget
Asian equities soared Friday to extend a surge on Wall Street, where all three indexes saw extreme swings in response to a forecast-beating inflation report that cemented expectations for more big Federal Reserve rate hikes.
Sterling also held on to its big gains sparked by speculation the UK government was set to perform another u-turn on its controversial debt-fuelled mini-budget, though the yen remained stuck around three-decade lows against the dollar.
The hotly awaited US inflation report showed prices rose last month at a faster clip than expected despite a series of interest rate increases this year, which have fanned fears of a global recession.
The month-on-month reading came in double estimates, while core inflation — which strips out volatile energy and food prices — was also elevated.
The figures sparked a sharp plunge on Wall Street but the selling quickly reversed, and all three main indexes finished the day with gains of more than two percent with analysts suggesting several reasons for the extreme move.
Some said the initial selling may have been a knee-jerk reaction before traders accepted the data was not as bad as other recent reports, while technical factors were also flagged.
Others speculated that equities had finally reached their bottom after a year of selling that has seen many indexes plunge into correction territory having lost more than 20 percent from their recent peaks.
“The market reversal was a head-scratcher”, said OANDA’s Edward Moya. “Some investors are convinced core inflation will soon start trending lower. Fed tightening will remain aggressive at 75 basis points in November and possibly December,” he added.
“Monetary policy is quickly getting restrictive and that will undoubtedly send inflation lower. It looks like rates will peak slightly above five percent and for some that is good enough of a reason to get back into stocks.”
However, he warned that “given the path for rates is higher, this market reversal won’t last long”.
– Yen weakness –
Still, Asian investors took the opportunity to buy up some bargains after another torrid week.
Tokyo, Hong Kong and Taipei put on more than three percent apiece, while Seoul was up more than two percent. Shanghai, Sydney, Singapore, Wellington, Manila and Jakarta were also sharply higher.
The pound was also still enjoying some much-needed support after breaking higher Thursday on reports that the new government was looking at rowing back on more tax-cut pledges in its mini-budget, which sparked turmoil on debt markets when released two weeks ago.
Sterling was sitting well above $1.13, having been wallowing below $1.10 early Thursday, with help also coming from Bank of England cash injections to prop up financial markets and prevent a collapse of pension funds.
The pound’s stronger position came despite Prime Minister Liz Truss’s insistence that there would be no more u-turns, after she was previously forced to scrap a plan to cut the higher rate of income tax.
However, the strong inflation data pushed the already strong dollar further up against other currencies and it hit a 32-year high of 147.67 yen, with traders now looking to see if Japanese officials intervene again to protect the struggling unit.
Japanese finance minister Shunichi Suzuki told the Group of 20 gathering in Washington DC that authorities were “watching the foreign exchange markets with a high sense of urgency, and we’ll take appropriate responses against excessive moves”.
Officials refused to say if they intervened Thursday following a big drop in response to the greenback’s spike.
The yen’s weakness comes from the Bank of Japan’s refusal to lift interest rates — citing a need to support the economy — at the same time as the Fed presses ahead with a series of big rate hikes.
– Key figures around 0230 GMT –
Tokyo – Nikkei 225: UP 3.4 percent at 27,141.18 (break)
Hong Kong – Hang Seng Index: UP 3.2 percent at 16,912.09
Shanghai – Composite: UP 1.4 percent at 3,059.30
Pound/dollar: DOWN at $1.1330 from $1.1333 Thursday
Dollar/yen: UP at 147.28 yen from 147.22 yen
Euro/dollar: UP at $0.9792 from $0.9780
Euro/pound: UP at 86.38 pence from 86.28 pence
West Texas Intermediate: UP 0.1 percent at $89.22 per barrel
Brent North Sea crude: UP 0.1 percent at $94.67 per barrel
New York – Dow: UP 2.8 percent at 30,038.72 (close)
London – FTSE 100: UP 0.4 percent at 6,850.27 (close)
