China COVID pivot boosts stocks, investors on edge before Fed

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By Carolyn Cohn

LONDON (Reuters) - U.S. stock index futures were indicating a higher Wall Street open and world stocks rallied on Friday on expectations China's economy would strengthen as COVID-19 curbs ease, but markets remain cautious ahead of a Federal Reserve meeting next week.

China's Premier Li Keqiang, in comments carried by state media, said on Thursday the country's shift in COVID-19 policy would allow the economy to pick up pace, a day after a top-level party meeting pledged to focus on stabilising growth while optimising pandemic measures.

Fed policymakers meet next week and are likely to announce a 50 basis point hike in the U.S. central bank's lending rate, while indicating a slower pace of future rate hikes.

"The market is very much focused on what the Fed is going to do on Wednesday, no one wants to take on any big positions," said Giles Coghlan, chief currency analyst at HYCM, though he added that Chinese stocks were helped by the fact that China had "made that COVID pivot".

The MSCI world equity index rose 0.3% but was heading for a loss of nearly 2% on the week.

U.S. S&P futures and European stocks gained 0.4%.

The U.S. producer price index for final demand at 1330 GMT is forecast to show a rise of 7.2% in the last 12 months, versus 8% the previous month, ahead of closely-watched consumer price inflation data next week.

University of Michigan consumer sentiment data is also due later on Friday.

Britain's FTSE steadied, reversing early losses as financial stocks benefited from a government move to overhaul the sector (L).

Hong Kong's Hang Seng index jumped 2.3% to three-month highs, with mainland developers up a whopping 9.9% to a four-month high. Chinese blue chips rose 1% to their highest in nearly three months.

The world's largest investment banks expect global economic growth to slow further in 2023 following a year roiled by the Ukraine conflict and soaring inflation, which triggered one of the fastest monetary policy tightening cycles in recent times.

Investors sold stocks and bought gold in the week to Wednesday, withdrawing $5.7 billion from equity funds, BofA Global Research said, a week of "small, joyless flows", as markets position for the approaching end of the Fed's rate hiking cycle.

Futures have priced in a near-certain possibility that the Fed will slow down its rate hike to 50 basis points next week, but the target U.S. federal funds rate would have to peak around 4.9% by next May.

"This slowing is not a signal that the central bank's job is nearly done...the slower pace of hikes starts a new phase of the Fed's tightening cycle," said Brian Martin, head of G3 economics at ANZ.

"With inflation proving sticky and the labour market still buoyant, the risks to our 5.00% terminal view are to the topside."

In addition to the Fed, the European Central Bank and the Bank of England are also set to announce interest rate hikes next week as policymakers continue to put the brakes on growth to curb inflation.

"There is certainly plenty to be fearful of economically, especially in Europe and the UK where the energy and cost of living crises seem likely to have already tipped, or will imminently tip, many economies into recession," said Sue Noffke, head of UK equities at Schroders (LON:SDR).

The U.S. dollar was steady against a basket of major currencies. It fell 0.6% to 135.88 yen.

The euro was flat at $1.0555, below recent five-month highs.

The benchmark 10-year Treasury yield was steady at 3.4924%.

Treasury yields fell to the lowest in three years earlier in the week on expectations of slower growth or that a recession will curb the rise in U.S. rates.

Euro zone banks are set to repay early another 447.5 billion euros in multi-year loans from the European Central Bank, bringing the total reduction of outstanding loans to nearly 800 billion euros in just a few weeks, the ECB said.

German 10-year government bond yields, the benchmark for the euro zone, gained 6 bps to 1.876%.

Oil was heading for a 10% weekly loss on worries over a weak economic outlook weighing on oil demand. [O/R]

U.S. West Texas Intermediate crude futures rose 0.5% to $71.81 per barrel, while Brent crude was steady at $76.16 a barrel.

Gold rose 0.6% to $1,800 per ounce. [GOL/]