LDN - Business

Hopes of early rate cuts underpin gains in world shares

[November 06, 2023] By Wayne Cole and Alun John

SYDNEY/LONDON (Reuters) - World shares were heading for a sixth straight session of gains on Monday, helped by last week's bond rally, as markets priced in earlier rate cuts in the United States and Europe, wagers to be tested by a swarm of central bank speakers this week.

Battered bond markets have enjoyed a welcome recovery as a benign U.S. payrolls report and upbeat productivity numbers suggested the labour market was cooling enough to obviate the need for further rate increases from the Federal Reserve.

Futures markets swung to imply a 90% chance the Fed was done raising rates, and an 86% chance the first policy easing would come as soon as June.

Markets also imply about an 80% probability the European Central Bank will cut rates by April, while the Bank of England is seen easing in August.

Benchmark U.S. 10-year yields fell around 29 basis points last week, the biggest weekly drop since March. Bond yields move inversely to their prices.

The rally paused on Monday, and the 10-year yield was last up around 3 bps at 4.587%, well down from mid-October's high over 5%.

"We would want to add a note of caution - yes, we are in the camp that says the inflation outlook will allow rate cuts next year, but going to more-and-sooner cuts feels like the pendulum has gone a bit too far," said Samy Chaar, chief economist at Lombard Odier.

"We've seen this back and forth before, and I think it's going to be the story for the coming quarters."

Central bankers have their own chance to weigh in on this dovish outlook, with at least nine Fed members speaking this week, including Chair Jerome Powell. Also on the docket are speakers from the BoE and ECB.

An odd man out is Australia's central bank, which is considered likely to resume raising rates at a policy meeting on Tuesday as inflation stays stubbornly high.

The Bank of Japan is also on the road to tightening, albeit at a glacial pace. The head of the central bank on Monday said it was closer to achieving its inflation target, but it was still not enough to end ultra-loose policy.

Hopes for lower borrowing costs continue to help shares, particularly those in Asia that missed out on the rally on Friday inspired by that day's U.S. jobs data.

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Passersby are reflected on an electric stock quotation board outside a brokerage in Tokyo, Japan April 18, 2023. REUTERS/Issei Kato/File Photo

MSCI's broadest index of Asia-Pacific shares outside Japan gained 2.0%, on Monday, pushing MSCI's world index up 0.38%, <.MIWD00000PUS>, its sixth session of gains.

The world index had its biggest weekly gain in a year last week. European shares opened in positive territory on Monday and were last hovering either side of flat after having their best week since March.

South Korea stood out, climbing 4.3% as authorities re-imposed a ban on short-selling to mid-2024.

S&P 500 futures and Nasdaq futures were both up 0.1%.

DOLLAR DROPS

Two-year Treasury yields paused at 4.875%, up 4 bps, after falling 17 bps last week, while the euro zone benchmark 10-year Bund yield was up 5 bps at 2.69%, after seven sessions of declines.

The retreat in Treasury yields pulled the rug out from under the dollar, with the dollar index down 0.14% at 104.91, its lowest since late September , having slid 1.3% last week.

The euro was up 0.17% at $1.0747, having surged 1% on Friday to its highest in nearly two months. The dollar has even lost ground in recent sessions to the ailing yen to stand at 149.57 yen , some way from its recent top of 151.74. [FRX/]

The drop in the dollar and yields helped underpin gold at $1,985, down a touch on the day, but within striking distance of the recent five-month peak of $2,009. [GOL/]

Oil prices edged higher, after shedding 6% last week, drawing support from confirmation Saudi Arabia and Russia would continue their additional voluntary oil output cuts.

In the Middle East, Israel on Sunday rejected growing calls for a ceasefire in Gaza, with military specialists saying that forces are set to intensify their operations against Palestinian Islamist group Hamas.

Brent added 1.5% to $86.31 a barrel, while U.S. crude climbed a similar amount to $81.75 per barrel. [O/R]

(Reporting by Wayne Cole and Alun John; Editing by Sam Holmes and Nick Macfie)

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