LDN - Business

Shares and bonds rally as Fed feeds global rate peak hopes

[November 02, 2023] By Marc Jones

LONDON (Reuters) - European shares and bonds extended a global rally on Thursday as a non-committal Federal Reserve chief had traders doubling down on bets that U.S. interest rates - the main driver of world borrowing costs - have finally peaked.

With expectations that the Bank of England might send a similar signal in a few hours, Europe's STOXX 600 and London's FTSE were both up over 1% early on, with the former on course for its first four-day run of gains since July.

Shorter-term bond market yields were at two-month lows [GVD/EUR] and the dollar was back-pedalling in the foreign exchange markets, much to the relief of the Japanese yen and the dozens of emerging market currencies that have been suffering this year. [/FRX]

Fed Chair Jerome Powell's comments that its aggressive 20-month run of rate increases was likely to slow the economy after what he had described as the "outsized" jump in Q3 U.S. GDP, was the main takeaway for many analysts, although he had been careful to keep the door open to another hike if needed.

"A lot of things went right for the rates market yesterday," Jefferies chief European economist Mohit Kumar said, adding that today's focus would be on the Bank of England and U.S. unemployment claims and factory orders data.

Sterling crept 0.2% higher to $1.2173 but slipped to 87.14 per euro as dealers waited for the BOE's rate decision due at 1200, which will also come with new economic forecasts.

Markets price an almost 90% chance the bank will keep UK rates at their current 15-year high of 5.25%, but have not fully priced a rate cut until September 2024 -- well after cuts are expected to have begun in other parts of Europe.

"Pricing is reflecting the view that BoE rates will have to remain on 'Table Mountain' for some months given the UK's inflation risks," said RaboBank FX strategist Jane Foley.

Jefferies' Kumar added: "we remain of the view that November could see a positive performance from rates, credit and equities".

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A man works at the Tokyo Stock Exchange after market opens in Tokyo, Japan October 2, 2020. REUTERS/Kim Kyung-Hoon/File Photo

APPLE EYED

Overnight, MSCI's broadest index of Asia-Pacific shares outside Japan had surged 1.6%，the biggest daily jump since late July. Tokyo's Nikkei had also gained 1.1% while S&P 500 futures and Nasdaq futures were pointing to another 0.5% rise on Wall Street later.

Investors are now awaiting results from Apple, a bellwether for consumer demand and the tech sector. The Cupertino California-based company is expected to report a 1% decrease in quarterly revenue.

The next big focal point after that will be U.S. non-farm payrolls data on Friday, which analysts expect to show the economy added 180,000 jobs in October, slowing from a 336,000 increase the previous month.

It will come after mixed data showed strong job openings and slower than expected growth in private payrolls.

Fed funds futures markets pared back the chance of a December rate hike to about 20% and a January move to 25%. Markets have priced in a 70% chance that the tightening is now over and U.S. rate cuts could begin as soon as June.

The upbeat mood was also lifting commodity markets. Brent crude futures climbed 1.6% to $85.95 a barrel while U.S. West Texas Intermediate futures were at $81.87 a barrel, up 1.8%.

The price of gold, which has surged almost 10% since Hamas' attack on Israel last month ignited Middle East tensions, was 0.2% higher at $1,985.99 per ounce.

(Additional Reporting by Stella Qiu in Sydney and Samuel Indyk in London; Editing by Emelia Sithole-Matarise)

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