Shares and bonds keep on climbing as Fed pivot rally rolls on

[December 15, 2023]  By Stella Qiu and Alun John

SYDNEY/LONDON (Reuters) -Shares and bonds on Friday globally continued to bask in the glow of Wednesday's Fed meeting, with MSCI's world share index set for a seventh straight winning week, its longest run in six years, and the benchmark 10-year Treasury yield below 4%.

Europe's broad STOXX 600 benchmark rose 0.37% to a 23-month high, and S&P 50 futures rose 0.2% after the benchmark had reached its highest since January 2022 on Wednesday around 2% off an all time high. SPX>

MSCI's broadest index of Asia-Pacific shares outside Japan rose 1% and touched its highest since August, lagging global benchmarks because of weakness in China.

Wednesday's Federal Reserve meeting continued to underpin stock and bond bulls. At that meeting, the Fed left interest rates unchanged, as expected, but policy makers pencilled in 75 basis points of rate cuts for 2024, and Chair Jerome Powell said the historic tightening of monetary policy was likely over, as inflation falls faster than expected.

Markets have taken that and run with it, pricing in around 150 basis points of Fed cuts next year, along with a similar amount from the European Central Bank, and 110 for the Bank of England, despite rate setters at both European central banks trying to push back against rate cuts at their Thursday meetings.

"It was an interesting 24 hours to say the least. The Fed, obviously was more dovish than was expected and the market has been rallying strongly on the back of that and Powell's comments which endorsed rate cuts for the first time," said Sebastian Vismara, senior financial economist at BNY Mellon Investment Management.

"The largest driver for the equity markets other than global growth expectations are U.S. real rates and the fact that the Fed came out so dovish is really meaningful. Global markets care a lot more about what the Fed does than the BoE or ECB."

MSCI's world share index was up 0.16% on the day, at its highest since April 2022 and set for a weekly gain of 2.7% its best week since the start of November, and set for its seventh week of gains in succession.

A man passes an electronic board displaying falls in global market indices outside a brokerage in Tokyo November 8, 2012. REUTERS/Yuriko Nakao/file photo

ECB President Christine Lagarde said on Thursday that policymakers "did not discuss rate cuts at all", but Friday PMI activity data showed difficulties in the euro zone economy: preliminary Composite PMI, fell to 47.0, worse than expected, and marking its seventh month below the 50 level separating growth from contraction.

Euro zone bonds rallied on the data, which challenges the ECB's higher for longer mantra. Germany's 10-year bond yield was down 8 basis points at 2.04% a whisker off the nine-month low it hit the day before. {GVD/EUR]

The U.S. 10-year yield was down 2 bps at 3.913%, on track for a 33 basis point weekly fall, its most since pandemic volatility in March 2020. [US/]

A raft of data from China was also in focus, and showed factory and retail sectors sped up in November, but some indicators missed expectations, suggesting the recovery is not solid yet.

Chinese bluechips gave up earlier gains to be 0.3% lower and hit a five-year trough. Hong Kong's Hang Seng index, however, rebounded 2.2%, driven by a more than 3% jump in Chinese real estate firms on news that Beijing and Shanghai have relaxed home purchase restrictions. [.SS]

In currency markets, the euro dipped 0.28% to $1.0961, hurt by the weak PMI data, but held onto the bulk of its 1.1% gain from Thursday after the ECB seemed more hawkish than the Fed. [FRX/]

Oil prices rose on Friday, on track to notch their first weekly rise in two months after benefiting from a bullish forecast from the International Energy Agency (IEA) on oil demand for next year and a weaker dollar.

U.S. crude rose 0.18% to $71.7 per barrel, while Brent was also up 0.25% to $76.80 per barrel. [O/R]

Spot gold was up 0.3% at $2,041.8 an ounce. [GOL/]

(Reporting by Stella Qiu; Editing by Lincoln Feast, Sam Holmes and Shri Navaratnam)

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