3:20 p.m. A variety of shifting factors moved global markets Thursday, but elements that didn't change are affecting the landscape too.
Asia-Pacific markets rose as the U.S. reached out to China for more trade talks; stocks in Turkey jumped after its central bank announced a bigger-than-expected rate increase; and the price of oil dropped as the International Energy Agency reported increased oil production from OPEC countries last month.
But there was a lot to learn from what remained steady. On Thursday, the Bank of England and European Central Bank both decided to leave their interest rates where they are, following the Federal Reserve's decision to do the same in August.
Higher interest rates usually attract foreign investment assets and therefore drive up the value of country's currency. But the euro and British pound both ticked higher against the U.S. dollar even though rates didn't change.
The reason might lie in prospects for the future.
The BOE's decision came after the central bank raised its key interest rate to 0.75% last month, the highest level since 2009. It also indicated at the time that there will be further rate increases to bring inflation down to its target level of 2%, from 2.5% in July.
The pause in rate increases this month, therefore, might just be temporary and partially due to the great uncertainty about the U.K.'s withdrawal from the European Union. The BOE said some British businesses have cut back on their investment plans, given the possibility of increased trade friction with the EU, although policy makers said they still anticipate a"smooth adjustment" in the Brexit process.
Sal Guatier i from BMO Capital Markets expects the next BOE rate increase to come in the spring of 2019, or perhaps earlier if there is a breakthrough on the Brexit talks. "The British government has to come to an agreement first, and stop the unproductive'let's get rid of Theresa' type comments." wrote Guatieri in a note Thursday, referring to efforts to oust Prime Minister Theresa May.
As for the European Central Bank, although rates remained unchanged Thursday, policy makers made clear in June that they will retreat from years of quantitative easing. That includes winding down the bank's bond purchases by the end of the year and beginning to raise interest rates in the summer of 2019.
12:22 p.m. U.S. markets went higher on Thursday, lifted by tech and material stocks, as Apple shares (AAPL) rose 2.6% after the long-awaited unveiling of its newest products.
The S&P 500 rose 0.4% to 2899.98, while the Dow Jones Industrial Average added 0.4% and the Nasdaq Composite climbed by 0.7%.
But more is happening outside of the U.S.
Turkey's central bank raised interest rates by more than 6 percentage points to a higher-than-expected 24%, giving investors a bit more confidence in the nation's economic prospects. That pushed the Turkish lira up by as much as 4.7% against the dollar. Higher rates can curb inflation; even after Thursday's move, the lira is down 38% so far this year.
The central bank's move also sent a signal to the world that it stands independent from the Turkish government. Earlier Thursday, President Recep Tayyip Erdogan called for lower rates to tackle the country's economic problems.
"The ignorance [of President Erdogan] is obvious but the Turkish central bank stood its ground and raised rates to 24% from 17.75%," a move that was 3 percentage points more aggressive than expected, writes Peter Boockvar from Bleakley Advisory Group.
Economic crises in Turkey, Venezuela, and Argentina have made investors worry that the trouble could spread to other emerging markets. Michael Darda, economist and strategist at MKM Partners, says valuations for emerging-market assets could shrink further this year, given a higher dollar, lower commodity prices, and a worsening trade war.
Asian markets jumped Thursday in response to renewed hope for trade talks between the U.S. and China. The Shanghai Composite Index rose 1.1%, and Hong Kong's Hang Seng Index surged 2.5%. Still, both indexes have entered bear-market territory this year, falling by more than 20% from their peaks.
Darda say the trade friction might not be resolved anytime soon. President Donald Trump wants to reduce the U.S.'s trade deficit, but tariffs aren't the best way to achieve that, he says. A recent Deutsche Bank report indicates tariffs have almost nothing to do with trade deficits.
"If the Trump/Navarro/Ross neo-mercantilist reaction function is to respond with ever steeper tariffs to worsening trade figures, a Smoot-Hawley like loop-to-loop may be the inevitable result." writes Darda in a note this week.
What would it take for the emerging markets to bounce back? Darda describes a favorable, but unlikely, scenario: The Fed stops raising rates before the yield curve inverts, the dollar weakens, and pro-trade voices in the administration call off the trade war.
Well, it never hurts to hope.
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