Shares rally as investor confidence in Fed cuts grows

[December 01, 2023]  By Amanda Cooper

LONDON (Reuters) -Global stocks edged up on Friday, having closed out their best month in three years the day before, as investor confidence that interest rates will fall next year has lured cash into equities, cryptocurrencies and gold at the expense of the dollar.

The MSCI All-World index eased 0.1%, mostly on the back of declines in Asian stocks.

Shares in Europe rose 0.6%, having posted their biggest monthly gain since January, up 6.5% in November, thanks to an acceleration in expectations for the European Central Bank to start cutting rates as early as April.

"Our sense is that quite a lot of the good news is already in the price. A little bit of profit-taking and rebalancing have probably played in the month-end, obscuring the messaging we typically get from the price action," said Rodrigo Catril, a senior FX strategist at the National Australia Bank.

The MSCI index posted its strongest monthly gain since November 2020 last month, while gold topped $2,000 an ounce for the first time since May and bitcoin is now nudging at 18-month highs.
 

Adding to a sense of relief that inflation is finally subsiding, oil prices fell over 2% overnight, after coordinated output cuts by the world's largest exporters fell short of market expectations.

Crude oil prices showed no reaction to Israel's military saying it has resumed combat against Hamas in the Gaza Strip, after a seven-day truce, raising the prospect of renewed violence in the Middle East.

Brent crude futures slipped 0.2% at $80.72 a barrel while U.S. futures were little changed at $75.88 a barrel.

Economic data from Asia played into the theme of slowing growth, as regional surveys of factory activity showed weakness in Japan and South Korea and mixed figures from China.

S&P 500 futures eased 0.1% and Nasdaq futures fell 0.2%.

COOL IT

Data on Thursday showed both U.S. and European inflation is cooling. Benign figures on U.S. inflation reinforced market expectations for about 115 basis points in rate cuts from the Federal Reserve next year, with a first move fully priced in for May.

A man walks through the lobby of the London Stock Exchange in London, Britain August 25, 2015. REUTERS/Suzanne Plunkett/File Photo

Euro zone inflation came in far below expectations, triggering a slide in the euro and prompting markets to price in rate cuts of nearly 120 basis points next year from the European Central Bank, possibly as early as April.

Goldman Sachs now expects the ECB to deliver its first interest rate cut in the second quarter of 2024, compared to an earlier forecast of a cut in the third quarter.

Jerome Powell takes part in a discussion later in the day and traders will be eager to get a sense of how the Fed Chair sees the recent shift in rate expectations towards a series of sustained cuts.

"I think he's going to be cautious about ramping those expectations up further, particularly as inflation is still on track, it's cooling, but it's still above their target. It would be unlikely that we hear a dovish tone from Powell," City Index strategist Fiona Cincotta said.

Fed Governor Christopher Waller, widely seen as a more hawkish policymaker, this week hinted at lower interest rates in the months ahead if inflation continued to ease.

The dollar index fell 0.2%, unwinding some of the previous day's 0.6% gain. The dollar fell 3% in November, its biggest monthly drop in a year.

The euro recovered some ground and rose 0.1% to $1.0902, while the pound rose 0.3% at $1.2662, supported by expectations that the Bank of England will take longer than either the Fed or the ECB in cutting rates.

U.S. Treasuries gained in price, their strongest monthly performance since 2011. The yield on 10-year Treasury notes dropped 4 bps to 4.315%, while two-year yields fell 5 bps to 4.668%.

Gold was up 0.4% at $2,045 an ounce. The price has vaulted above $2,000 as investors have ditched their holdings of dollars and U.S. bond yields have fallen - two factors that make it more attractive to own gold.

(Reporting by Stella Qiu; Editing by Jamie Freed, Miral Fahmy, William Maclean)

[© 2023 Thomson Reuters. All rights reserved.]
This material may not be published, broadcast, rewritten or redistributed.  Thompson Reuters is solely responsible for this content.