GLOBAL MARKETS-Shares cautious, U.S. yield curve deep in recession territory

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Asian Stock Markets : https://tmsnrt.rs/2zpUAr4

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Choppy markets after Fed warnings on rates

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US yield curve most inverted since 1981

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The dollar runs into a fresh sell-off, but it’s not the lowest of the week

By Wayne Cole

SYDNEY, Nov 18 (Reuters) – Asian shares were in a cautious mood on Friday after U.S. Federal Reserve officials fired more warning shots on interest rates, as an increase in coronavirus cases in China and liquidity pressures in its bond market contributing to uncertainty.

Both the dollar and bond yields were shoved higher overnight when St. Louis Fed President James Bullard said interest rates that hit a range of 5% to 7% may need to be “restrictive enough” to curb add to inflation.

That was a blow to investors who were betting on rates peaking at 5% and saw fed fund futures sell off as markets were now more likely to see rates higher at 5-5.25%, rather than 4.75- 5.0%.

Two-year returns rose 4.46%, reversing a sharp 33 basis point inflation-driven fall to last week’s low of 4.29%. That left them 69 basis points above 10-year yields, the biggest inversion since 1981.

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“The message is about the desire from the Fed to continue against what they would think of premature release of financial conditions,” said Brian Daingerfield, analyst at NatWest Markets. “And on that side, the message was received.

“The Fed seems very focused on over-signaling on the tightening side and hoping that the data will slow down to a point where they can have the flexibility to undershoot.”

Bond market warnings of a recession weren’t exactly what Wall Street wanted to hear and left S&P 500 futures flat, while Nasdaq futures rose 0.1%.

EUROSTOXX 50 futures added 0.7% and FTSE futures 0.3%.

MSCI’s broadest index of Asia-Pacific shares outside Japan jumped 0.5%, after sliding for two sessions.

Chinese blue chips were flat amid reports Beijing asked banks to check bond market liquidity after rising yields caused losses for some investors.

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There were also concerns that a rise in COVID-19 cases in China would challenge plans to ease the severe curbs on movement that have crippled the economy.

BOJ NOT TO DETERMINE

Japan’s Nikkei rose 0.1% as data showed inflation was running at a 40-year high as a weak yen weighed on import costs.

Still, the Bank of Japan argues that inflation is largely driven by energy costs over which it has no control and that the economy needs continued ultra-easy policies.

The situation was very different in Britain, where finance minister Jeremy Hunt had just announced tax increases and spending cuts in an attempt to reassure markets that the government was serious about fighting inflation.

On expectations that the economy was already in recession, sterling stood at $1.1916, higher than the week’s $1.2026.

After bouncing overnight, the dollar itself ran into renewed selling and eased to 106.460 on a basket of currencies, back towards a three-month high of 105.30 touched earlier in the week. The dollar also edged lower at 139.78 yen, but was above its recent low of 137.67.

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The euro was at $1.0376, having eased from a four-month peak of $1.0481 hit on Tuesday as some policymakers insisted they were cautious about tightening.

ECB President Christine Lagarde will deliver a keynote speech later on Friday that could provide guidance on how the bank’s majority may continue.

In commodity markets, the bounce in the dollar and yields left gold at $1,762 an ounce off a peak of $1,786 reached earlier in the week.

Oil futures managed to regain some ground on Friday, but continued to post heavy losses throughout the week due to concerns about Chinese demand and ever-higher interest rates in the US. Brent added 79 cents to $90.57, to be down 5.5% on the week, while US crude rose 92 cents to $82.56 a barrel.

(Reporting by Wayne Cole; Editing by Bradley Perrett and Sam Holmes)

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