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Wednesday 21:05 GMT. US and European equities put in mixed performances and government bond yields mostly declined as the focus in the markets remained firmly on the outlook for central bank policy around the world.
The S&P 500 equity index reversed an early bout of weakness to close 0.8 per cent stronger at a record high. The turnround came amid rumours that introductory remarks to the Senate Banking Committee from Janet Yellen, the nominated successor to Ben Bernanke as chair of the Federal Reserve, would be released before her confirmation hearing on Thursday – and would be bullish for equities.
In Europe, the FTSE Eurofirst 300 ended 0.6 per cent lower, having been down more than 1.1 per cent at one stage. In London, however, the FTSE 100 fell 1.4 per cent, its biggest one-day drop since August.
The Bank of England’s quarterly inflation report provided plenty of interest in the markets as it said the UK economy was recovering so quickly that it could potentially bring forward the timing of a rise in UK interest rates, giving a boost to sterling.
The Bank’s Monetary Policy Committee said it now expected the 7 per cent employment rate, at which it has pledged to reassess its policy stance, to be reached much earlier than previously expected.
It emphasised, however, that monetary policy would stay unchanged for a long time yet. The MPC also suggested inflation would fall below the central bank’s 2 per cent target in the course of its forecast horizon.
Jens Larsen, chief European economist at RBC Capital Markets, said he was sticking to his call for the first rate rise to come in the third quarter of 2016 – but acknowledged the risk of an earlier increase was clearly material.
“Market pricing of tightening is little changed,” he said. “Although we still expect the first rate hike to be in 2016 we concede that market pricing may stay stubbornly opposed to that view in the short term against the backdrop of better data.”
Sterling jumped sharply, rising 0.7 per cent against the dollar to regain the $1.60 level and 0.5 per cent against the euro.
The single currency , meanwhile, briefly fell below $1.34 after Peter Praet, a member of the European Central Bank’s executive board, was reported as saying the central bank could adopt negative interest rates if needed to lift inflation. The ECB cut its main refi rate last week to a record low in response to recent concerns about falling inflation.
Riccardo Barbieri, chief European economist at Mizuho Securities, said Mr Praet’s remarks were certainly significant – but in line with comments by other ECB officials who had reiterated that all options remained on the table.
“Mr Praet also suggested that the ECB could undertake outright purchases if additional stimulus was needed. We do not believe that either policy will be adopted, but that the ECB at this stage is simply keen to show it is not running out of tools.”
Other analysts noted that ECB asset purchases were very likely to be challenged in the German constitutional court. Indeed, the euro rallied off its lows to trade 0.2 per cent higher at $1.3461 at the end of the New York session, although the yield on the 10-year German government bond fell 5 basis points to 1.74 per cent.
The Bund yield also fell as disappointing eurozone industrial production data for September suggested the sector had been a modest drag on growth in the third quarter of the year.
In the UK, the 10-year gilt yield rose as high as 2.86 per cent, according to Reuters data, before falling back to finish 1bp lower on the day at 2.80 per cent. The yield spread between 10-year gilts and Bunds hit its highest since 2005.
In the US, the 10-year Treasury yield was down 5bp at 2.72 per cent.
Meanwhile, shares in Shanghai and Hong Kong fell sharply amid disappointment at a lack of detail on the country’s economic reforms. The Shanghai Composite fell 1.8 per cent and the Hang Seng 1.9 per cent.
Bank of America Merrill Lynch said: “Our overall impression is that there is nothing significantly new on the reform front,” adding that China’s leaders “still seem to emphasise stability over decisive actions”.
Uncertainty about Chinese demand, as well the timing of possible Fed tapering – helped push copper down 2 per cent in London to a three-month low of $6,980 a tonne. But elsewhere in industrial commodities , Brent oil settled at $107.12 a barrel, up $1.31.
Gold rallied after four straight days of losses, rising $6 to $1,274 an ounce.
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