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GLOBAL MARKETS-Shares, dollar climb as Fed lays out new inflation strategy

Thu, 27th Aug 2020 21:25

(Adds close of U.S. markets)

* MSCI's global index climbs to new highs

* S&P 500, Nasdaq also at new records on inflation push

* Dollar gains as Fed pushes new strategy, as expected

* Longer-dated Treasuries move up on inflation outlook

By Herbert Lash

NEW YORK, Aug 27 (Reuters) - A gauge of world equity markets
and the dollar rose on Thursday after the U.S. Federal Reserve
said it would roll out an aggressive new strategy that aims to
boost employment and allow inflation to run a bit faster for
longer than in the past.

Yields gained on longer-dated government bonds as Fed Chair
Jerome Powell laid out a policy that aims for 2% inflation on
average so that too-low a pace would be followed by an effort to
lift inflation "moderately above 2% for some time."

The Fed also aims to ensure that employment does not fall
short of its maximum level, a new approach Powell said reflected
an appreciation "that a robust job market can be sustained
without causing an unwelcome increase in inflation."

The dollar rebounded after initially falling and gold prices
also flipped in choppy trade, retreating from early gains on
Powell's comments, which investors had widely expected.

"Ultimately, this just means interest rates are going to
stay very, very low for even longer than we expected," said Esty
Dwek, head of global market strategy at Natixis Investment
Managers in Geneva.

"It's lower for even longer and the market was pretty much
anticipating this," Dwek said.

Interest rate-sensitive financial stocks gained on
the view that longer-dated rates will rise, or what borrowers
pay, and widen the spread with shorter-maturity securities on
which banks fund their lending.

"I'm delighted because financials are doing quite well
today, they're leading the charge," said Andrew Slimmon, a
senior portfolio manager at Morgan Stanley Investment
Management.

"These financial companies, not just the big banks, they're
reporting very good quarters but their stocks are being priced
as if it's a one-time surge," Slimmon said.

The dollar index rose 0.198% and spot gold prices
fell -1.16% to $1,930.85 an ounce. The S&P 500, the
Nasdaq and MSCI's global equity benchmark all set new intraday
highs, though the Nasdaq closed lower.

Stocks also rose on news that Abbott Laboratories
won U.S. marketing authorization for a COVID-19 portable antigen
test that can deliver results in 15 minutes and will sell for
$5. Abbott shares rose 7.9%.

MSCI's benchmark for global equity markets
fell 0.11% to 583.41, while Europe's broad FTSEurofirst 300
index closed down 0.57% at 1,438.26.

On Wall Street, the Dow Jones Industrial Average rose
0.57% and the S&P 500 gained 0.17%. The Nasdaq Composite
dropped 0.34%.

"The market will probably take some time to digest the
implications," said Nancy Davis, chief investment officer at
Quadratic Capital Management LLC in Greenwich, Connecticut.

"But I believe that a higher willingness to let inflation
run above 2% should hurt long-end bonds and inflation
expectations probably should increase," she said.

Powell's remarks on achieving full employment, one of the
Fed's dual mandates, came as new data suggested the labor market
recovery was stalling as the COVID-19 pandemic drags on and
financial aid from the government dries up.

The number of Americans filing new claims for unemployment
benefits hovered around 1 million last week, while the U.S.
economy suffered its sharpest contraction in at least 73 years
in the second quarter, two government entities said.

While the 10-year U.S. Treasury note rose 5.4
basis points to 0.7423%, it remained within a range it has
mostly held since March, when the Fed flooded the market with
liquidity to drive down market rates.

Safe-haven 10-year German bund yields rose to
their highest since early July at -0.384%.

The euro was last down 0.08% at $1.1820.

U.S. gold futures settled down 1.4% at $1,924.60 an
ounce.

Oil prices fell as a massive hurricane in the Gulf of Mexico
made landfall in the heart of the U.S. oil industry, forcing oil
rigs and refineries to shut down.

Brent crude futures settled down 55 cents at $45.09
a barrel. U.S. crude futures fell 35 cents to settle at
$43.04 a barrel.

(Reporting by Herbert Lash; Editing by Bernadette Baum, Tom
Brown and Richard Chang)

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