GLOBAL MARKETS-Shares cautious, U.S. yield curve deep in recession territory

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Asian stock markets: https://tmsnrt.rs/2zpUAr4

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Markets jittery after Fed rate warnings

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The US yield curve is the most inverted since 1981

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The dollar is selling off again, but is below weekly levels

By Wayne Cole

SYDNEY, Nov 18 (Reuters) – Asian shares were cautious on Friday after U.S. Federal Reserve officials fired more warning shots on interest rates, while a rise in coronavirus cases in China and liquidity pressures in its bond market added to uncertainty.

Both the dollar and bond yields were lifted overnight after St. Louis Fed President James Bullard said interest rates may need to reach a range of 5% to 7% to be “tight enough” to curb inflation.

That was a blow to investors who previously bet rates as high as 5% and saw a sell-off in Fed funds futures as markets were more likely to see rates now rise by 5-5.25% rather than 4.75-5.0%.

The two-year yield rose again to 4.46%, rebounding slightly from last week’s sharp inflation-driven drop of 33 basis points to a low of 4.29%. That left them 69 basis points above the 10-year yield, the biggest inversion since 1981.

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“The report is about the Fed’s willingness to back off what they would see as premature easing of financial conditions,” said Brian Dangerfield, an analyst at NatWest Markets. “And a message was received in this area.

“The Fed seems completely focused on over-signaling on the tightening front and hoping the data will slow down to a point where they can flexibly reduce it.”

Bond market warnings of a recession weren’t exactly what Wall Street wanted to hear, leaving S&P 500 futures flat and Nasdaq futures up 0.1%.

EUROSTOXX 50 futures added 0.7% and FTSE futures added 0.3%.

MSCI’s broadest index of Asia-Pacific shares outside Japan rebounded 0.5%, after falling for two sessions.

China’s blue chips were flat as Beijing reportedly asked banks to test bond market liquidity after a rise in yields led to losses for some investors.

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There were also concerns that a surge in COVID-19 cases in China would cast doubt on plans to ease strict restrictions on movement that have slowed the economy.

BOJ IS NOT FOR AMENDMENT

Japan’s Nikkei rose 0.1% as data showed inflation hit a 40-year high as a weak yen weighed on import costs.

However, the Bank of Japan says inflation is mainly driven by energy costs beyond its control and that the economy needs continued ultra-easy policy.

The situation was radically different in Britain, where Chancellor of the Exchequer Jeremy Hunt had just announced tax hikes and spending cuts in an attempt to convince markets that the government was serious about fighting inflation.

Ominous predictions that the economy was already in recession saw sterling hit $1.1916, down from a weekly high of $1.2026.

After bouncing overnight, the dollar itself started to sell off again and fell to 106.460 in a basket of currencies, back from the three-month low of 105.30 touched earlier in the week. The dollar also fell to 139.78 yen, but held above a recent low of 137.67.

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The euro held steady at $1.0376, down from a four-month high of $1.0481 hit on Tuesday, as some policymakers argued for caution on increasing tightening.

ECB President Christine Lagarde is due to deliver a keynote speech later on Friday that may provide clues as to which way the bank’s majority might lean.

In commodity markets, the rebound in the dollar and yields left gold at $1,762 an ounce, after hitting a peak of $1,786 earlier in the week.

Oil futures recovered some ground on Friday, but still suffered heavy losses for the week on concerns about Chinese demand and rising US interest rates. Brent was up 79 cents at $90.57, down 5.5% on the week, while U.S. crude was up 92 cents at $82.56 a barrel.

(Reporting by Wayne Cole; Editing by Bradley Perrett and Sam Holmes)

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