LONDON- World stocks marched back towards record highs on Thursday as surging inflation saw Britain and Norway hike interest rates after the U.S. Federal Reserve accelerated its stimulus withdrawal.
The European Central Bank was up next and there was another rout for Turkey's battered lira as its central bank went the other way, ploughing on with rate cuts.
Omicron numbers were rocketing globally too, forcing some countries to bring in new travel restrictions, but for once it was not infecting the markets.
The pan-European STOXX 600 index jumped 1.5%, led by the tech and energy sectors. Record high Wall Street was set to rise again, while sterlingand UK bank shares shot up after the BOE ended months of flirting with the idea and hiked rates, albeit by only 0.1%.
Hussain Mehdi, Macro and Investment Strategist, HSBC Asset Management, said the 8-1 vote by BOE policymakers to raise rates was "fairly surprising" given the surge in Omicron cases although there were solid reasons to do so.
"The labour market is tight, and Omicron has the potential to exacerbate supply-side constraints in goods and labour," Mehdi said. "Ongoing upside inflation risks are likely to push the MPC into further action in 2022."
The Fed had laid out a scenario in which the pandemic, despite the Omicron surge, gives way to a benign set of economic conditions, with inflation easing largely on its own, interest rates increasing slowly, and unemployment staying low.
"The economy no longer needs increasing amounts of policy support," Fed Chair Jerome Powell had said.
"If the Fed moves (hikes interest rates next year), it will be okay as long as there is growth," said Barrow Hanley's Head of International Equities Rand Wrighton, referring to bets U.S. rates could go up three times before the end of 2022.
Attention now turns to the ECB in Frankfurt which is also trying to balance the need to support economies threatened by the virus with the need to cut money printing to cool price rises.
The ECB's 1245 GMT policy statement is expected to see it dial back its stimulus one more notch. But it is also expected to pledge ongoing support, sticking to its long-held view that inflation will abate on its own.
Earlier Norway's central bank had also raised its main interest rate for the second time in three months and said more were likely as long as Omicron doesn't force mass lockdowns again.
Sterling raced past $1.33 after the BOE's hike move having peaked for the year back in May at $1.4250. Shares in Britain's big banks like Barclays and Lloyds jumped more than 5% on the basis that they will now be able to push up lending rates.
The euro EUR=EBS was soft peddling at just below $1.13 after forward-looking euro zone purchasing manager data had come in weaker than expected earlier.
Europe is facing a fourth wave of infections and many governments have been encouraging citizens to stay home and avoid unnecessary social contact.
IHS Markit's Flash Composite Purchasing Managers' Index, a good indicator of overall economic health, dropped to 53.4 in December from 55.4 in November, its lowest since March and below the 54.0 predicted in a Reuters poll.
That headline number was dragged down by the services PMI, which sank to an eight-month low of 53.3 from 55.9. While above the 50-mark separating growth from contraction it missed the Reuters poll estimate for 54.1.
"The euro zone economy is being dealt yet another blow from COVID-19, with rising infection levels dampening growth in the service sector in particular to result in a disappointing end to 2021," said Chris Williamson, chief business economist at IHS Markit.
It wasn't looking like a good Christmas for Turkey either.
The lira dropped nearly 4% to an all-time low beyond 15 against the dollar after another 100 basis point interest rate cut by the central bank, which has fallen in line with President Tayyip Erdogan's risky new economic programme.
"We exited local markets in September - we went to zero," said Aegon Asset Management's head of emerging market debt Jeffery Grills, blaming the direction the country's economic and monetary policies were now taking.
The lira has halved in value this year, and worries are mounting about what could happen if low rates and stimulus ahead of presidential elections in 2023 continue to ramp up inflation which is already above 20%.
"The accompanying statement suggests that the easing cycle will be on pause early next year but, even so, the lira will remain under pressure and capital controls are likely," said Jason Tuvey at Capital Economics.
Things were far smoother in the commodity markets. Oil rose to $75 supported by record U.S. implied demand and falling crude stockpiles, while cooperwhich is highly sensitive to the health of the global economy rebounded 2.2% after falls on Wednesday has taken its losses since October past 11%.
(Reporting by Marc Jones; additional reporting by Kevin Buckland in Tokyo; editing by Raissa Kasolowsky and Philippa Fletcher) ((firstname.lastname@example.org; +44 (0)20 7513 4042; Reuters Messaging: email@example.com Twitter @marcjonesrtrs))
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