Shares gain as rate cut bets pile up

[December 28, 2023]  By Tom Wilson and Wayne Cole

LONDON/SYDNEY (Reuters) - World shares gained on Thursday as market wagers on ever-more aggressive interest rate cuts stretched a rally in U.S. stocks and bonds, while the dollar fell to five-month lows.

European shares added 0.2% to approach a 23-month high hit two weeks ago, and were on course for gains of about 13% this year.

Wall Street was set for gains, too, with S&P 500 futures up 0.1% to another record high and Nasdaq futures firming 0.2%.

The S&P 500 has climbed 14% in just two months to come within a whisker of its all-time closing peak, while its price to earnings ratio is up by a quarter on the year at 24.0.

The MSCI world equity index, which tracks shares in 47 countries, gained 0.3%.

An absence of major news has not stopped investors from ramping up bets on rapid-fire rate cuts next year from the Federal Reserve.

Futures now imply an 88% chance of a rate cut as early as March, a huge swing from a month ago when the probability was just 21%.

The market has about 157 basis points of easing priced in for 2024, and sees rates reaching 3.00-3.25% over 2025.

"The rapid decline in inflation is likely to lead the Fed to cut early and fast to reset the policy rate from a level that most participants will likely soon see as far offside," wrote analysts at Goldman Sachs in a note.

"We expect three consecutive 25bp cuts in March, May, and June, followed by one cut per quarter until the funds rate reaches 3.25-3.5% in 2025 Q3. Our forecast implies 5 cuts in 2024 and 3 more cuts in 2025."

Germany's 10-year bond yield was steady near its lowest in more than a year.

Earlier, MSCI's broadest index of Asia-Pacific shares outside Japan added another 1.5%, to be up about 11% in two months and at its highest since August.

BOND BULGE

Yields on 10-year Treasury notes stood at 3.812%, having hit a five-month low overnight. The two-year yield was down at 4.273%, having been as high as 5.295% as recently as October. [US/]

The London Stock Exchange Group offices are seen in the City of London, Britain, December 29, 2017. REUTERS/Toby Melville/File Photo

The falls weighed broadly on the U.S. dollar and lifted the euro to its highest since July at $1.1129. The single currency was last at $1.1115, having gained 2% so far this month to within sight of its 2023 top of $1.1276.

The dollar index, which measures the U.S. currency against six rivals, fell to a fresh five-month low of 100.76. The index is on course for a 2.6% decline this year, snapping two straight years of strong gains.

Sterling reached a five-month top of $1.2816, after cracking resistance at $1.2794 overnight.

"Investors are placing more weight on Fed expectations driving currencies, than the signaling from other central banks like the ECB," said Alan Ruskin, global head of G10 FX strategy at Deutsche Bank.

"In part, that's because the Fed also has more impact on the overall global risk environment, which has become more risk friendly and thereby also less USD positive."

The dollar also lost ground to the yen at 140.995 yen , having shed 4.7% for the month so far. It is still up sharply for the year as the Bank of Japan takes a glacial approach to tightening its super-easy policies.

In an interview published on Wednesday, BOJ Governor Kazuo Ueda said he was in no rush to unwind those loose policies as the risk of inflation running well above 2% and accelerating was small.

Oil prices, which slid on Wednesday, remained subdued as concerns over supplies eased after major shippers announced they would return to the Red Sea. [O/R]

Brent edged up 10 cents to $79.85 a barrel, while U.S. crude fell 5 cents to $74.14 per barrel.

(Reporting by Tom Wilson in London and Wayne Cole in Sydney; Editing by Edwina Gibbs, Sam Holmes and Christina Fincher)

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