LDN - Business

Wall Street set to open higher as traders bet on rate cuts

[December 19, 2023] By Elizabeth Howcroft

London (Reuters) -European stocks rose on Tuesday and global shares were near their highest since April 2022 as traders bet on rate cuts in 2024, while the yen fell after the Bank of Japan stuck to its ultra-easy monetary policy.

In a widely expected move, the Bank of Japan kept its ultra-low interest rates unchanged. It also made no change to its dovish policy guidance, dashing traders' hopes it would tweak the language to signal a near-term end to negative interest rates.

The yen tumbled, with dollar-yen up 1.4% at 144.76 at 1158 GMT and euro-yen up 1.4% at 158.32. The Nikkei rose in relief, led by technology shares, and Japanese government bonds yields fell.

The supportive sentiment helped boost global markets more broadly, with the MSCI World Equity index up 0.1% on the day. Europe's STOXX 600 was up 0.2%, Germany's DAX was up 0.3% but London's FTSE 100 was flat on the day .

Wall Street was set to open a touch higher, with S&P 500 and Nasdaq futures both up around 0.1%.

The Bank of Japan's "dovish stance... is something that is supportive of sentiment and we've been seeing that playing out in equities which are just moving modestly higher", said Fiona Cincotta, senior markets analyst at City Index.

Cincotta said that lower liquidity may also be a factor in market moves, as traders take leave ahead of the Christmas holiday.

Meanwhile, traders were weighing up various hints about the trajectory for rates in the U.S. and euro zone.

European Central Bank member Francois Villeroy de Galhau said interest rates should be lowered in 2024 and that inflation should be back down to the ECB's 2% target by 2025 at the latest.

"This is not just a forecast, this is a commitment," he said.

IMMINENT CUTS

At the central bank's meeting last week, ECB President Christina Lagarde pushed back against market bets on imminent rate cuts, but markets were not convinced. Dovish ECB policymaker Yannis Stournaras also told Reuters on Monday that the ECB must see inflation stable at below 3% by the middle of next year before beginning to lower rates.

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Traders look at their screens as the German share price benchmark DAX hits a record high at the stock exchange in Frankfurt, Germany, December 14, 2023. REUTERS/Timm Reichert/File Photo

"Although the ECB pushed back on rate cuts, given that inflation is close to that 2% level, given that we’re seeing weakness in data, I don’t think the market necessarily finds it that credible that they’re going to be keeping rates elevated for much longer," Cincotta said.

Euro zone government bond yields were down, with the benchmark German 10-year yield lower 3 basis points at 2.04%.

The euro was up 0.2% at $1.09395. The U.S. dollar index was flat at 102.53, after dropping 1.3% last week.

The 10-year U.S. Treasury yield was at 3.9163%.

Treasury yields dropped last week after Federal Reserve chair Jerome Powell was seen as unexpectedly dovish at the end of the Fed's meeting. Yields then reversed course on Monday, rising after Chicago Federal Reserve President Austan Goolsbee pushed back against market pricing of interest rate cuts.

Federal Reserve Bank of Cleveland President Loretta Mester told the Financial Times on Monday that markets had got "a little bit ahead" of the central bank on when to expect interest rate cuts.

Oil was steady. Oil prices had benefited from the Iran-aligned Yemeni Houthi militant group attacking ships in the Red Sea.

The Houthis have stepped up the missile and drone attacks they began last month against international vessels sailing through the Red Sea, in response to Israel's assault on the Gaza Strip. The U.S. said it was leading a multinational operation to protect the commercial ships.

Brent crude futures were little changed at $77.96 per barrel while U.S. West Texas Intermediate crude was down 0.1% at $72.4 per barrel.

Gold was steady at $2,026.3 an ounce.

(Additional reporting by Rae Wee in Singapore and Kantaro Komiya in Tokyo; Editing by Edmund Klamann, Christopher Cushing, Miral Fahmy and Ed Osmond)

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