Global shares up in risk-on start to 2023

Global shares have risen, defying a pick-up in the dollar as investors piled into riskier assets like equities and commodities, while weighing up how much the recent surge in COVID-19 infections in China might affect its economy.

The MSCI All-World index on Tuesday rose 0.2 per cent, thanks to a sharp bounce in European stocks led by hefty gains in anything from financials to oil and gas stocks, and healthcare.

Typically, stocks tend to fall when the dollar gains, but that negative correlation between the two softened on Tuesday to its weakest since early September.

The euro was the worst-performing currency against the dollar, falling by more than 1 per cent on the day, after German regional inflation data showed consumer price pressures eased sharply in December, thanks in large part to government measures to contain natural gas bills for households and businesses.

Data on US payrolls this week are expected to show the labour market remains tight, while EU consumer prices could show some slowdown in inflation as energy prices ease.

"Energy base effects will bring about a sizeable reduction in inflation in the major economies in 2023 but stickiness in core components, much of this stemming from tight labour markets, will prevent an early dovish policy 'pivot' by central banks," analysts at NatWest Markets wrote in a note.

They expect interest rates to top out at 5 per cent in the United States, 2.25 per cent in the EU and 4.5 per cent in Britain and to stay there for the entire year. Markets, on the other hand, are pricing in rate cuts for late 2023, with Fed fund futures implying a range of 4.25 to 4.5 per cent by December.

"The thing that makes me nervous about this year is that we still do not know the full impact of the very significant monetary tightening that's taken place across the advanced world," Berenberg senior economist Kallum Pickering said.

"It takes a good year, or 18 months, for the full effect to kick in," he said.

Central banks have expressed concern about rising wages, even as consumers have struggled to keep up with the soaring cost of living and companies are running out of room to protect their profitability by raising their own prices.

But, Pickering said, the labour market tends to lag the broader economy by some time, meaning that there is a risk that central banks could be raising interest rates by more than the economy can withstand.

"What central banks are inducing is essentially excess cyclicality, which is - they overstimulated in 2021 and triggered an inflationary boom and then overtightened in 2022 and triggered a disinflationary recession. It's exactly the opposite of what you want central banks to do," he said.

Investors will get their first insight into central bank thinking when the Federal Reserve releases the minutes from its December policy meeting later this week.

The minutes will likely show many members saw risks that interest rates would need to go higher for longer, but investors are conscious of how much they've risen already.

On the markets, European shares rose in early trading, with gains in energy stocks such as BP and Shell. The STOXX 600, which lost 13 per cent in 2022, rose 0.6 per cent. The FTSE 100, the only major European index not to trade on Monday, rose 1.4 per cent.

US stock index futures gained between 0.4 and 0.5 per cent, pointing to an upbeat start at the opening bell.

Markets have for a while priced in an eventual US easing, but they were badly wrong-footed by the Bank of Japan's shock upward shift in its ceiling for bond yields.

The BOJ is now considering raising its inflation forecasts in January to show price growth close to its 2 per cent target in fiscal 2023 and 2024, according to the Nikkei.

Such a move at its next policy meeting on January 17-18 would only add to speculation of an end to ultra-loose policy, which has essentially acted as a floor for bond yields globally.

The policy shift has boosted the yen across the board, with the dollar losing 5 per cent in December and the euro 2.3 per cent.

The yen took a breather on Tuesday, holding roughly steady against the dollar at 130.47. The dollar earlier touched a six-month low of 129.52 yen, while the euro fell to its lowest in three months at 137.45 yen.

In commodities, oil and copper edged up, in spite of the strength of the dollar, although concern about demand in China, the world's second largest economy, kept gains in check.

A batch of surveys had showed China's factory activity shrank at the sharpest pace in nearly three years as COVID infections swept through production lines.

"China is entering the most dangerous weeks of the pandemic," warned analysts at Capital Economics.

Brent crude rose 0.3 per cent to $US86.19 a barrel, while US crude gained 0.5 per cent to trade around $US80.63, while London Metal Exchange copper prices were up about 0.9 per cent at $US8452 a tonne.