Global stock rally fades as recession worries linger

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By Naomi Rovnick and Wayne Cole

LONDON/SYDNEY (Reuters) -A short-lived bounce for global stocks faded on Thursday, as easing U.S. inflation expectations were overshadowed by fears about an economic downturn.

Futures markets indicated Wall Street's benchmark S&P 500 share index would drift 0.2% lower at the opening bell, having gained 1.5% in the previous session. Contracts on the tech-focused Nasdaq 100 also fell 0.2%.

Easing gas prices pulled U.S. consumer 12-month inflation expectations down to 6.7% this month, the lowest since September 2021, data showed on Wednesday.

Meanwhile a separate survey the previous day showed U.S. consumer confidence rose to its highest since April, beating expectations of economists polled by Reuters, while strong results from Nike (NYSE:NKE) also pulled Wall Street higher.

"We are still in a bear market," said Luca Paolini, chief strategist at Pictet Asset Management. "You get the odd short rally and then it goes flat. There is very low conviction. The only conviction is that there is going to be a recession."

The S&P 500 is on course to end the year almost 19% lower, while MSCI's broad gauge of world stocks has dropped by the same amount, falling for eight of the last 12 months.

The Federal Reserve raised its main interest rate by 50 basis points in its seventh hike of the year in December. Money managers see the Fed's tightening campaign as likely to hasten the U.S. economy into recession, which should in turn cause stubbornly high inflation to turn lower.

"The view is that we are getting close to the end of rate hikes and perhaps there will be a (Fed) pivot," said Anish Grewal, portfolio manager at London-based hedge fund Enora Global.

"Markets are too relaxed about this," he said, but "the expectations are that we get to around September next year and we are in rate-cutting mode."

The dollar index, which measures the U.S. currency against a basket of six others, slipped by as much as 0.5% earlier in the day, before recovering to trade flat. The index has dropped almost 2% so far this month.

Sterling eased 0.3% to $1.205 after data showed Britain's economy contracted more than first thought in the third quarter.

Against the Japanese yen, the dollar lost 0.3% to trade around 132.12 yen, nudging back towards the four-month low it reached earlier this week when the Bank of Japan, the world's most dovish major central bank throughout 2022, took a surprisingly hawkish turn.

Investors continue to grapple with the fallout of the BOJ's shock decision to allow government bond yields to rise, in a tweak to its controversial yield-curve control policy.

Ten-year government bond yields rose as high as 0.483% this weak, the highest since July 2015 and within a whisker of the BOJ's new ceiling of 0.5%.

"The jump in yields and the further strengthening of the yen will lower the value of assets owned by Japanese investors," analysts at Capital Economics said.

Capital Economics also now expects the dollar to drop toward 125 yen next year.

In U.S. fixed income, the benchmark 10 year Treasury yield fell 3 basis points to 3.656% as inflation expectations eased off. This key debt yield, which underpins loan pricing worldwide, exceeded 4.2% as recently as late October.

Oil prices rallied after data showed a larger-than-expected draw in U.S. crude stockpiles with a massive snowstorm expected to blanket much of the United States and hit travel-related demand for fuel. [O/R]

Brent crude added 1.7% to $83.57 a barrel and U.S. crude gained 1.3% to $79.57.[O/R]