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Stocks are unstable as hawkish The RBA makes policy worries worse

Image: Reuters Berita 24 English -   World stocks fell on Tuesday, and bond yields stayed strong, because Australia's unexpected 50-basi...

Image: Reuters

Berita 24 English -  World stocks fell on Tuesday, and bond yields stayed strong, because Australia's unexpected 50-basis-point rate hike raised concerns about policy tightening before this week's U.S. inflation data and a meeting of the European Central Bank.

The Reserve Bank of Australia (RBA) raised interest rates by the most in 22 years and said there will be more tightening to come as it tries to stop rising inflation. This caused the Aussie to rise briefly and hurt local stocks.

At 8:43 GMT, the MSCI's benchmark for global stocks had dropped by 0.3%, to 650 points. This was due to losses in Europe and Asia in the morning.

The pan-European stock market index STOXX 600 fell by 0.4%, and the S&P 500 e-mini futures fell by the same amount.

Boris Johnson, the British prime minister, barely won a vote of no-confidence from his party's lawmakers on Monday. This led to talk of replacing him, which hurt the value of the pound and the gilts.

Allan Monks, an economist at J.P. Morgan, said that the vote casts serious doubt on his ability to stay in charge.

"If he can buy enough time, this will make it more likely that fiscal policy will be loosened even more to try to turn things around. If not, the Conservatives could still choose a new leader, which would mean he would have to leave "he added.

After going up for six days in a row, the 10-year Treasury yield went down by 1 basis point (bps) in European trade. However, it stayed above the important 3 percent mark before data on Friday that is likely to show that inflation is still high.

A hot reading could make people even more worried that the Federal Reserve could keep raising rates quickly after the expected 50 bps increase at its policy meeting next week.

In Europe, benchmark 10-year German bund yields also went down by about 1 basis point, but they stayed close to their highs from Monday. This is because the ECB is holding a meeting on Thursday, where they are likely to confirm that rates will be going up soon. Their last price was 1.31 percent.

"There have been a few reasons for these moves higher, but one of the most important ones in the last week and a half has been the belief that near-term recession risks are starting to go away again," said Jim Reid, a strategist at Deutsche Bank, in a note. "This will allow central banks to keep raising interest rates, which will push bond yields higher."

"On top of that, recent inflation data has been more stable than expected, which has also pushed yields up, and investors are eagerly waiting to see if the US CPI reading on Friday gives us another upside surprise," he said.

Also, the yield on a 10-year gilt hit a new seven-year high of 2.265 percent, and as of the end of the day, it was almost the same as the day before. This was because the confidence vote hurt Johnson.

Worries about the U.S. inflation data kept the dollar in demand on foreign exchange markets.

The dollar's value against the yen hit its highest level since 2002 after Bank of Japan Governor Haruhiko Kuroda stayed dovish and promised to help the economy and keep monetary policy easy, even though prices are starting to go up.

After hitting a three-week low, the value of the pound fell 0.16 percent to $1.250. The euro held steady at $1.069. Losses were kept to a minimum by the possibility that the ECB would take a more aggressive stance.

Oil prices went up a little bit because people think that demand will pick up in China now that the world's second-largest economy is loosening its strict COVID-19 limits. Also, people aren't sure that OPEC+ producers' plan to increase production will make the tight supply less of a problem. [O/R]

Brent futures went up 0.4% to $120.03 per barrel, while U.S. West Texas Intermediate futures went up 0.5% to $119.09 per barrel.

Gold was near its lowest level in a week because U.S. yields and the dollar were going up. At $1,842.9 per ounce, spot gold was up 0.1%.

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