Supercharged markets surge on interest rate cut signals
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[December 14, 2023] By
Marc Jones
LONDON (Reuters) - Stock markets sprinted to their highest in over a
year and a half and borrowing costs and the dollar tumbled on Thursday,
as traders bet that Europe's top central banks would join the U.S. Fed
later in signaling interest rate cuts for next year.
Switzerland's central bank was already out the blocks pointing to
subdued global growth and it was a fast start for Europe's STOXX 600
which leapt 1.6% to its highest in almost 2 years ahead of Bank of
England and European Central Bank decisions later.
MSCI's 47-country world stocks index was adding to its stellar 13% gain
over the last 1-1/2 months, while bond market borrowing costs were in a
tailspin, with German bund and U.S. Treasury yields at nine- and
four-month lows respectively. [GVD/EUR]
It was the reaction to the Fed on Wednesday where Jerome Powell had said
its historic tightening of monetary policy was likely to be over with
inflation now falling faster than expected.
A near-unanimous 17 of its 19 policymakers had projected the Fed funds
rates would be lower in a year's time - with the median forecast showing
a three-quarters of a percentage point drop from the current 5.25%-5.50%
range.
That provided a surprise and left markets betting that cuts could start
as soon as March and might end up being double the amount as the Fed's
ratesetters currently expect.
"The big question for today is how much central banks hunt in packs,"
State Street Global Markets' head of macro strategy Michael Metcalfe
said, referring to the upcoming BOE and ECB rate decisions.
"The assumption is, that if the Fed didn't push back no one will and
everyone will pivot together".
"Interest rate markets have moved a lot... and given what the Fed has
said markets will see that as a vindication of those moves."
The central banks weren't the only things Europe's traders were
watching, however.
Hungarian Prime Minister Viktor Orban was digging his heels in at a
high-stakes summit in Brussels, saying that Ukraine did not fulfill the
criteria to start accession talks with the EU.
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Signage for the London Stock Exchange Group is seen outside of
offices in Canary Wharf in London, Britain, August 3, 2023.
REUTERS/Toby Melville/File Photo
Orban is blocking both the start of EU membership talks and 50
billion euros ($54 billion) in financial aid for Kyiv.
The summit comes at a crucial time in Ukraine's war against Russia's
invasion after a counter-offensive failed to make major gains and
with the Biden administration in the United States so far unable to
get a $60 billion aid package through Congress.
"There is no reason to negotiate membership of Ukraine now," Orban
said as he arrived at the Brussels summit. "Pre-conditions were not
met. We have to come back to it later on," he said, pointing at
European Parliament elections next June.
DOLLAR DOWN
In Asia overnight, the focus had all been on the Fed's signals which
had also prompted a sharp rally on Wall Street.
MSCI's broadest index of Asia-Pacific shares outside Japan shot up
1.8%, its biggest one-day percentage jump in a month although China
had stumbled again and a stronger yen pushed Toyko down 0.7%. [.T][.SS]
The Fed's pivot "is a definitely a good surprise for assets," Close
Brothers Asset Management's Chief Investment Officer Robert Alster
said, describing it as "unadulterated good news and an early
Christmas present for all", albeit one that heaps pressure on the
BOE and ECB later.U.S. stock futures were pointing to a more modest
0.2% rise for the S&P 500 later, as the 10-year Treasury yield
pushed as low as 3.9845%, breaking below the psychological 4% mark.
The U.S. dollar index, which measures the greenback against a basket
of currencies, fell a further 0.3% to 102.53, leaving it at $1.09 to
the euro and down nearly 1% versus the yen at 141.82 yen.
Spot gold was up 0.23% at $2,030.99 per ounce, after rising 2.4% on
Wednesday. Oil extended its gains too with Brent up $1, or 1.3%, to
$75.26 a barrel and U.S. West Texas Intermediate (WTI) up 80 cents,
or 1.1%, to $70.27. [O/R]
(Reporting by Marc Jones, Editing by Alexandra Hudson)
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