Morning Chronicle - Markets extend rally as rate hike fears subside

With prices surging at a pace not seen in a generation, finance chiefs have been forced to lift borrowing costs and wind back their ultra-loose monetary policies in recent months, sending a chill across trading floors.

But a string of weak data has led many investors to believe that inflation may have plateaued or is about to, giving room for banks to be less hawkish.

The prospect that rates will not go as high as initially expected helped send Wall Street stocks higher Friday, with the S&P 500 and Nasdaq ending up more than three percent.

And Asia continued last week's rally.

Hong Kong led gainers, climbing more than two percent thanks to a strong performance in Chinese tech firms. Indications that China's crackdown on the sector could be coming to an end added to the upbeat mood in the city.

Tokyo, Shanghai, Seoul, Singapore, Sydney, Manila, Bangkok, Mumbai and Wellington were also well up.

London, Paris and Frankfurt were all up in early trade.

"Market conviction that perhaps the Fed won't now hike rates as aggressively as previously feared and/or that rate cuts before the end of 2023 are now an even more realistic prospect if recession-like conditions lay ahead, have had a big hand in last week's improvement in risk sentiment," said National Australia Bank's Ray Attrill.

He added that the rally had helped pare about two-thirds of the losses suffered in a painful sell-off from June 9 to 16.

While Fed chiefs continue to flag further big interest rate hikes in the pipeline, expectations for a prolonged period of increases have waned, which has in turn taken some heat out of the dollar.

Bitcoin has also won some support, after falling to as low as $17,600 last week for the first time since December 2020.

"There's a feeling that things aren't as bad as we thought they were going to be," Carol Pepper, of Pepper International, told Bloomberg Radio.

"There's a hope that perhaps we've oversold, perhaps there's not going to be a recession," she said.

But others warned that while the markets were enjoying a moment of calm, they were not out of the woods yet.

"Over the last week, equity markets have snapped back from oversold territory, which brought a sense of relief to investors," said Bank of Singapore's Eli Lee.

"It is unsurprising in bear markets to see relief rallies, which can be unpredictable in magnitude and duration. However, we continue to see a fragile environment for risk assets over the next 12 months."

Traders are keeping an eye on the G7 summit in Germany, which is set to be dominated by Russia's war in Ukraine.

The leaders agreed money collected from higher trade tariffs imposed on Russian exports should be funnelled as aid to Ukraine, the White House said.

- Key figures at around 0810 GMT -

Tokyo - Nikkei 225: UP 1.4 percent at 26,871.27 (close)

Hong Kong - Hang Seng Index: UP 2.4 percent at 22,229.52 (close)

Shanghai - Composite: UP 0.9 percent at 3,379.19 (close)

London - FTSE 100: UP 0.9 percent at 7,270.69

Dollar/yen: DOWN at 135.06 yen from 135.17 yen late Friday

Pound/dollar: UP at $1.2315 from $1.2280

Euro/dollar: UP at $1.0587 from $1.0559

Euro/pound: UP at 85.97 pence from 85.95 pence

West Texas Intermediate: UP 0.2 percent at $107.80 per barrel

Brent North Sea crude: UP 0.6 percent at $113.72 per barrel

New York - Dow: UP 2.7 percent at 31,500.68 (close)

F.Corbyn--MC-UK