Stocks rally as Fed rate hopes dent dollar

© Reuters. FILE PHOTO: People walk past an electric board showing Japan's Nikkei share average in Tokyo, Japan September 14, 2022. REUTERS/Issei Kato

By Herbert Lash and Huw Jones

NEW YORK/LONDON (Reuters) - Global stocks rallied on Friday for a second day on hopes cooler U.S. inflation would lead to less aggressive interest rate hikes by the Federal Reserve, an outlook that pushed the dollar to its biggest two-day drop in 13 years.

Crypto exchange FTX filed for U.S. bankruptcy and founder Sam Bankman-Fried stepped down as chief executive, while oil prices jumped after health authorities in top global crude importer China eased some of the country's heavy COVID-19 curbs.

Gold prices rose to a near three-month high and headed to at least their best week since July 2020 after Thursday's better-than-expected report on U.S. consumer prices bolstered bets that the Fed would be less hawkish about hiking rates.

On Wall Street, stocks rose to add to the prior day's biggest daily percentage gains for the S&P 500 and Nasdaq in more than 2-1/2 years after year-over-year inflation in October fell below 8% for the first time in eight months.

"We got a potential view that the Fed may not need to get as horrible as we thought over the last couple of weeks," Marvin Loh, senior global macro strategist at State Street (NYSE:STT) in Boston, said about the market's exuberance. "Risk could be stabilizing here."

The Fed has no choice but to press on, but if inflation is no longer rising, that indicates the end of more extensive tightening may be near, Loh said.

The Dow Jones Industrial Average rose 0.1%, the S&P 500 gained 0.92% and the Nasdaq Composite advanced 1.88%.

MSCI's all-country world index rose 1.91%, lifting it to its highest levels since mid-September, as the market repriced expectations for the Fed's target rate to peak below 5%, or about 20 basis points lower than recent highs.

The MSCI emerging markets index jumped 5.19%, in its biggest single-day surge since March.

Market bets that the Fed will raise rates by 50 basis points at its next meeting in December increased, while the probability of a 75 basis points hike decreased.

"While this year has been amazingly exciting and fascinating from a market perspective, maybe its crescendo was really yesterday," said Christian Chan, chief investment officer at AssetMark Financial Holdings Inc.

The CPI report showed that when "you peeled back the number, it kept on getting better," but labor markets and corporate margins will be pressured as the Fed fights to lower inflation, posing potential headwinds for risk assets, Chan said.

In Europe, euro zone yields firmed and the EU's executive European Commission said it sees a bigger euro zone slowdown in 2023, though only slightly affecting jobs or public finances.

Britain's economy shrank in the three months to September at the start of what is likely to be a lengthy recession.

John O'Toole, global head of multi-asset investment solutions at asset manager Amundi, said the reaction in stock markets to the CPI showed investors were "pretty desperate" for good news and could be getting ahead of themselves.

Rates could "stay at an elevated level for an extended period of time, and that's something that financial markets just don't have in their outlook," O'Toole said.

The weaker outlook for corporate earnings and jobs has yet to be fully priced into markets, he added.

U.S. inflation, Fed rates and markets https://fingfx.thomsonreuters.com/gfx/mkt/lgvdkmrlgpo/One.PNG

Investors poured into risky assets after the U.S. data, driving the dollar down 1.6% on the day. The greenback posted its biggest two-day decline since March 2009.

The yield on benchmark U.S. 10-year paper slipped below 4% on Thursday. U.S. bond markets are closed on Friday for Veterans Day.

Asian shares scaled a seven-week high, with MSCI's broadest index of Asia-Pacific shares outside Japan set for its biggest one-day percentage jump since March 2020.

In China, health authorities on Friday eased the country's heavy COVID curbs, including shortening by two days the quarantine times for close contacts of cases and inbound travelers. The country's blue-chip CSI 300 index rose 2.8% and the Hang Seng Index surged 7.7%.

Oil prices rose after the U.S. inflation data but were on track for weekly declines of more than 4% due to COVID-related worries in China. [O/R]

U.S. crude futures settled up $2.49 at $88.96 a barrel, while Brent rose $2.32 to settle at $95.99.

U.S. gold futures settled up 0.9% at $1,769.40 an ounce.

The turmoil in cryptocurrency markets this week sent bitcoin to two-year lows. After the FTX announcement, bitcoin fell 4.17% to $16,819.00.

FTX's native token FTT plunged 28.47% at $2.666, having fallen 90% month-to-date.