Sterling has fallen by about a fifth against the dollar this year

Hong Kong (AFP) - The pound bounced Wednesday on speculation the Bank of England could continue to support troubled financial markets past a deadline set for the end of the week.

The positive turn also helped equity markets in Asia reverse an early selloff, though traders remained on edge and analysts warned that the volatility that has characterised trading for most of the year was unlikely to let up any time soon.

Investors had started the day on yet another gloomy note after a drop on Wall Street in response to an announcement by the BoE that it would stop its emergency bond-buying efforts on Friday, ignoring calls to extend the programme to allow markets to stabilise.

The UK central bank was forced last month to step into financial markets to prevent a collapse of pension funds caused by a spike in bond prices after a debt-fuelled, tax-cutting mini budget by new finance minister Kwasi Kwarteng sparked fears of a surge in borrowing.

However, a report in the Financial Times said the BoE had told lenders it was ready to continue its emergency programme if pensions were at risk.

The pound, which had dropped to as low as $1.0924 Wednesday, shot back to around $1.1020 as angst-ridden investors were calmed.

OANDA’s Craig Erlam said that while BoE boss Andrew Bailey’s “warnings to pension funds this week gave the impression there’s no turning back, it would appear that isn’t entirely true. And that shouldn’t be as surprising as it seemingly is.

“While the hope within the central bank will be that its emergency measures have allowed pension funds to recalibrate and address the vulnerability in the bond market, if that doesn’t prove to be the case it would be ridiculous to pull the rug from under it rather than extend the measures until the end of the month when we get the full budget.”

- Range of crises -

Stocks also enjoyed a much-needed bounce, though nervousness continued to course through trading floors.

Hong Kong saw a more than three percentage-point swing from a loss to a gain, while Shanghai, Sydney, Seoul, Manila, Mumbai and Bangkok were also up.

Tokyo was flat and there were losses in Singapore, Wellington, Taipei and Jakarta.

London opened on a positive note, along with Paris and Frankfurt.

Still, investors were struggling to find some solace as they navigate a range of crises that threaten the global economy, from soaring prices and bumper interest rate hikes to the Ukraine war and China’s Covid-induced growth slowdown.

The gloom was summed up by the International Monetary Fund, which on Tuesday highlighted the risks of inflation and the conflict in Europe as it slashed its global growth forecast and warned: “For many people 2023 will feel like a recession”.

Later, US President Joe Biden admitted there was a chance the country could suffer a “slight” recession.

Investors are now nervously looking ahead to Thursday’s US inflation report, with observers warning that a strong reading could spark another rout.

Still, analysts said the Fed would not likely take a single positive reading as a reason to slow down its pace of rate hikes as it lasers in on bringing inflation down from four-decade highs.

“I don’t see any imbalances yet that would cause a pivot from the Fed,” said Citigroup’s Veronica Clark on Bloomberg Television.

“The Fed will pay attention to global financial stability concerns, a strong dollar is part of that, but it’s ultimately going to be domestic conditions and what the Fed is seeing on inflation.”

The slight easing of market tensions also helped the yen claw back losses against the dollar, having fallen to a new 24-year low against the dollar, breaking the level touched last week when Tokyo stepped into the market to support the Japanese unit.

Recession fears and China’s Covid-linked economic woes also kept oil prices in check, after they surged last week on an outsized OPEC output cut, with many warning that demand will plunge as people refrain from spending.

- Key figures around 0720 GMT -

Tokyo - Nikkei 225: FLAT at 26,396.83 (close)

Hong Kong - Hang Seng Index: UP 1.1 percent at 17,020.21

Shanghai - Composite: UP 1.5 percent at 3,025.51 (close)

London - FTSE 100: UP 0.2 percent at 6,896.30 (close)

Pound/dollar: UP at $1.1004 from $1.0972 Tuesday

Dollar/yen: UP at 146.16 yen from 145.83 yen

Euro/dollar: UP at $0.9727 from $0.9709

Euro/pound: DOWN at 88.37 pence from 88.46 pence

West Texas Intermediate: FLAT at $89.33 per barrel

Brent North Sea crude: DOWN 0.3 percent at $94.57 per barrel

New York - Dow: UP 0.1 percent at 29,239.19 (close)