Stocks stalled by rate risks, yen droops again

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By Marc Jones

LONDON (Reuters) - Stock markets were sluggish and the dollar and bond yields shuffled higher on Thursday as the likelihood of a further jump in global borrowing costs, including a possible 100 basis point U.S. rate hike next week, kept the bears on the prowl.

With recession worries still nagging, Wall Street looked set for an early dip, Europe's bourses were handing back morning gains .EU and Japan's yen JPY=EBS - pummelled to a 24-year low this month - was drooping again after Tokyo posted a record trade deficit. (Full Story)

It was a big day for crypto markets with a major software upgrade to the Ethereum blockchain dubbed the "Merge" taking place (Full Story).

China's central bank refrained from providing more support overnight and though there had been some welcome signs of support for the country's battered property market, geopolitics were in play as Chinese leader Xi Jinping said he would work with Russia's Vladimir Putin to "instill stability and positive energy in a chaotic world". (Full Story)

The broader focus however remained squarely on the risk of rising interest rates and painfully high energy prices causing recessions.

Credit rating firm Fitch became the latest to slash its world economy forecasts while bond markets were watching the German yield curve invert - another classic recession indicator. (Full Story)

"We’ve had something of a perfect storm for the global economy in recent months," Fitch Chief Economist Brian Coulton said, blaming "the gas crisis in Europe, a sharp acceleration in interest rate hikes and a deepening property slump in China".

The dollar, which has soared this year amid the jump in U.S. interest rates and global scramble for safety, was showing its strength again.

Expectations that the Federal Reserve will raise rates another 75-100 basis points next week pushed the greenback back up 0.3% against the yen JPY=EBS, after the yen jumped on Wednesday when some timely Bank of Japan calls to FX desks had triggered intervention talk. (Full Story)

The euro was nudged back below parity against the dollar too. It was down 0.1% at $0.9985 and not too far from a 20-year low of $0.9864 hit last week. Britain's pound, which has also been hammered over the last month due concerns about the country's finances GBP=D3, likewise was 0.4% softer at just under $1.15 /FRX

"The (Bank of Japan) steps were in reality the last efforts to halt JPY depreciation before actual intervention," MUFG's European global markets research head Derek Halpenny said.

"But it is also highly likely that there is still a deep reluctance on the part of the authorities to intervene," he added, on the view that such action might not be successful in the current environment.

Japan has not intervened in forex markets since 2011 and back then it was to restrain an overly strong yen.

FLAT AND FLATTENING

U.S. data on Thursday include weekly jobless claims and retail sales both of which will feed the debate on whether the world's largest economy can withstand interest rates going as high as 5% according to some banks' estimates.

Around 226,000 Americans are expected to have filed for jobless claims for the week-ended Sept. 10, up from 222,000 in the previous week. Meanwhile, retail sales for August are largely expected to remain unchanged month-on-month.

S&P 500 ESc1, Dow 1YMc1 and Nasdaq futures NQc1 were all broadly flat, pointing to a slow day on Wall Street, .N although parts of the market were expected to react positively to news that a U.S. railroad strike had been avoided. .N (Full Story)

Back in Asia, Tokyo hadn't been the only Asian capital concerned about currency weakness. South Korea's won bounced off a near 13-year low overnight as it appeared that its authorities had been dishing out verbal FX intervention again. (Full Story)

Among the main stock markets, MSCI's broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS turned during the session to finish down 0.2%. The Nikkei .N225 rose 0.2% though, while the main Hong Kong property index .HSMPI surged over 4% after reports that some Chinese developers were finally being allowed to slash prices. (Full Story)

The world's second-largest economy narrowly avoided contracting in the second quarter as widespread COVID-19 lockdowns and the slumping property sector badly damaged consumer and business confidence.

With few signs China will significantly ease zero-COVID soon, some analysts expect the economy to grow by just 3% this year, which would be the slowest since 1976, excluding the 2.2% expansion during the initial COVID hit in 2020.

"Equity markets are presently in no-man's land," said Sean Darby, global equity strategist at Jefferies in Hong Kong.

"Better macro news to support earnings is discounted as (there is) the need for further tightening to quash growth – while CPI prints are not declining fast enough," he said.

Fed funds futures 0#FF:, which were dumped along with stocks after Tuesday's stubbornly hot U.S. inflation reading but were helped by lower producer price figures on Thursday, imply a 30% chance of a 100 basis point rate hike next week. They have the benchmark U.S. interest rate as high as 4.3% by February. FEDWATCH

Two-year U.S. yields US2YT=RR, which track near-term rate expectations, edged up to 3.029%, bringing the rise for the week so far to 23 basis points in a seventh straight weekly gain.

European moves saw the 2-year German yield rise 2.5 bps to 1.435% leaving it just off its highest since July 2011. DE2YT=RR. Germany's 10-year yield, the euro zone's benchmark, rose 4.5 basis points (bps) to 1.746%. DE10YT=RR

ING analysts said comments by European Central Bank chief economist Philip Lane on Wednesday had endorsed the hawks' narrative. It "is another clue that the central bank has experienced a significant shift in its reaction function," they wrote.

In commodities, European gas prices rose for a third day running. Brent oil LCOc1 dipped $1.38 to $92.68 a barrel. Spot gold XAU= dropped 0.8% to $1,683 an ounce, having steadily slipped as the dollar and U.S. yields have gone up.Stock markets were sluggish and the dollar and bond yields shuffled higher on Thursday as the likelihood of a further jump in global borrowing costs, including a possible 100 basis point U.S. rate hike next week, kept the bears on the prowl.

With recession worries still nagging, Wall Street looked set for an early dip, Europe's bourses were handing back morning gains .EU and Japan's yen JPY=EBS - pummelled to a 24-year low this month - was drooping again after Tokyo posted a record trade deficit. (Full Story)

It was a big day for crypto markets with a major software upgrade to the Ethereum blockchain dubbed the "Merge" taking place (Full Story).

China's central bank refrained from providing more support overnight and though there had been some welcome signs of support for the country's battered property market, geopolitics were in play as Chinese leader Xi Jinping said he would work with Russia's Vladimir Putin to "instill stability and positive energy in a chaotic world". (Full Story)

The broader focus however remained squarely on the risk of rising interest rates and painfully high energy prices causing recessions.

Credit rating firm Fitch became the latest to slash its world economy forecasts while bond markets were watching the German yield curve invert - another classic recession indicator. (Full Story)

"We’ve had something of a perfect storm for the global economy in recent months," Fitch Chief Economist Brian Coulton said, blaming "the gas crisis in Europe, a sharp acceleration in interest rate hikes and a deepening property slump in China".

The dollar, which has soared this year amid the jump in U.S. interest rates and global scramble for safety, was showing its strength again.

Expectations that the Federal Reserve will raise rates another 75-100 basis points next week pushed the greenback back up 0.3% against the yen JPY=EBS, after the yen jumped on Wednesday when some timely Bank of Japan calls to FX desks had triggered intervention talk. (Full Story)

The euro was nudged back below parity against the dollar too. It was down 0.1% at $0.9985 and not too far from a 20-year low of $0.9864 hit last week. Britain's pound, which has also been hammered over the last month due concerns about the country's finances GBP=D3, likewise was 0.4% softer at just under $1.15 /FRX

"The (Bank of Japan) steps were in reality the last efforts to halt JPY depreciation before actual intervention," MUFG's European global markets research head Derek Halpenny said.

"But it is also highly likely that there is still a deep reluctance on the part of the authorities to intervene," he added, on the view that such action might not be successful in the current environment.

Japan has not intervened in forex markets since 2011 and back then it was to restrain an overly strong yen.

GRAPHIC: Yen's biggest drop in decadeshttps://fingfx.thomsonreuters.com/gfx/mkt/movaneowopa/Pasted%20image%201663232168526.png

FLAT AND FLATTENING

U.S. data on Thursday include weekly jobless claims and retail sales both of which will feed the debate on whether the world's largest economy can withstand interest rates going as high as 5% according to some banks' estimates.

Around 226,000 Americans are expected to have filed for jobless claims for the week-ended Sept. 10, up from 222,000 in the previous week. Meanwhile, retail sales for August are largely expected to remain unchanged month-on-month.

S&P 500 ESc1, Dow 1YMc1 and Nasdaq futures NQc1 were all broadly flat, pointing to a slow day on Wall Street, .N although parts of the market were expected to react positively to news that a U.S. railroad strike had been avoided. .N (Full Story)

Back in Asia, Tokyo hadn't been the only Asian capital concerned about currency weakness. South Korea's won bounced off a near 13-year low overnight as it appeared that its authorities had been dishing out verbal FX intervention again. (Full Story)

Among the main stock markets, MSCI's broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS turned during the session to finish down 0.2%. The Nikkei .N225 rose 0.2% though, while the main Hong Kong property index .HSMPI surged over 4% after reports that some Chinese developers were finally being allowed to slash prices. (Full Story)

The world's second-largest economy narrowly avoided contracting in the second quarter as widespread COVID-19 lockdowns and the slumping property sector badly damaged consumer and business confidence.

With few signs China will significantly ease zero-COVID soon, some analysts expect the economy to grow by just 3% this year, which would be the slowest since 1976, excluding the 2.2% expansion during the initial COVID hit in 2020.

"Equity markets are presently in no-man's land," said Sean Darby, global equity strategist at Jefferies in Hong Kong.

"Better macro news to support earnings is discounted as (there is) the need for further tightening to quash growth – while CPI prints are not declining fast enough," he said.

Fed funds futures 0#FF:, which were dumped along with stocks after Tuesday's stubbornly hot U.S. inflation reading but were helped by lower producer price figures on Thursday, imply a 30% chance of a 100 basis point rate hike next week. They have the benchmark U.S. interest rate as high as 4.3% by February. FEDWATCH

Two-year U.S. yields US2YT=RR, which track near-term rate expectations, edged up to 3.029%, bringing the rise for the week so far to 23 basis points in a seventh straight weekly gain.

European moves saw the 2-year German yield rise 2.5 bps to 1.435% leaving it just off its highest since July 2011. DE2YT=RR. Germany's 10-year yield, the euro zone's benchmark, rose 4.5 basis points (bps) to 1.746%. DE10YT=RR

ING analysts said comments by European Central Bank chief economist Philip Lane on Wednesday had endorsed the hawks' narrative. It "is another clue that the central bank has experienced a significant shift in its reaction function," they wrote.

In commodities, European gas prices rose for a third day running. Brent oil LCOc1 dipped $1.38 to $92.68 a barrel. Spot gold XAU= dropped 0.8% to $1,683 an ounce, having steadily slipped as the dollar and U.S. yields have gone up.