European stocks gain, dollar strong as traders cut Fed easing bets
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[April 12, 2024] By
Naomi Rovnick and Kevin Buckland
LONDON/TOKYO (Reuters) - European stocks were on track to race ahead of
Wall Street on Friday, with exporter shares in high demand as the
continent's major currencies dropped against a dollar standing tall on
bets the U.S. Federal Reserve would keep interest rates high.
Europe's broad Stoxx share index, rose 1.1% on Friday morning as a weak
euro flattered the domestic value of exporters' dollar earnings.
London's FTSE 100 was 1.3% higher, boosted by global mining and oil
stocks.
Futures markets implied Wall Street's S&P 500 share index, which is on
track for its second weekly drop, would open 0.1% lower, while Nasdaq
100 futures dropped 0.3%.
MSCI's all-country equity index was steady, on course for its second
weekly fall after hotter-than-expected consumer price data mid-week
forced traders to sharply pull back on U.S. rate-cut bets.
Money-market pricing implied investors expect the Fed to reduce its main
funds rate by about 45 bps this year. U.S interest rates are at a
23-year high of 5.25%-5.5% and traders started 2024 betting on about 150
bps of cuts.
"In the near term it is going to be harder for the Fed to cut than for
the European Central Bank," said Marcelo Carvalho, global head of
economics at BNP Paribas.
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The U.S. labour market is strengthening and its economy is outshining
global peers, while euro zone inflation is dropping towards the ECB's 2%
target as growth and bank lending in the euro currency bloc weaken.
"Investors are starting to wonder if the Fed will be able to cut at all
this year," Barclays analyst Anshul Pradhan said.
The dollar index rose 0.5% on Friday to 105.82, taking the U.S.
currency's weekly gain against a basket of major peers to 1.5%. [FRX/]
Japan's yen touched a 34-year low of 153.34 per dollar as traders waited
for signs that authorities in Tokyo might intervene to strengthen the
flailing currency.
The ECB and the Bank of England are predicted to begin reversing their
own historically aggressive monetary tightening efforts sooner, in a
trend that has weighed on the euro and sterling this week.
The ECB on Thursday strongly signalled it would lower its main deposit
rate from a record 4% in June.
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A passerby walks past an electric monitor displaying recent
movements of various stock prices outside a bank in Tokyo, Japan,
March 22, 2023. REUTERS/Issei Kato/File Photo
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The euro touched a five-month low of $1.0674 on Friday. Sterling,
previously a popular carry trade currency for speculators who
believed the BoE would cut after the Fed, slid to $1.2508, also a
near five-month low.
Fed officials, by contrast, said on Thursday there was no urgency to
ease. Boston Fed President Susan Collins commented that the strength
of the economy and an uneven retreat in inflation argued against a
near-term push to lower rates.
Long-term U.S. Treasury yields, which act as a benchmark for
valuations of riskier assets like stocks, on Friday traded at 4.54%,
up 16 bps this week and having risen from less than 3.9% in January
as the price of the debt fell.
Investors in U.S. government debt have since early 2023 banked on
gains from falling interest rates. But according to Bank of America,
the 10-year annualized return from Treasuries now stands at just
0.6%, a 65-year low.
The yield on the interest-rate sensitive two-year German bond was 8
bps lower on the day at 2.89%.
Economists have also queried whether the ECB would cut in June but
then remain cautious about diverging from Fed policy too much to
prevent the euro weakening to the point higher dollar-denominated
import costs could re-stoke inflation.
"Beyond June, the ECB is keeping its options open," Deutsche Bank
economists said in a note to clients. "The risk is skewed towards
the ECB easing less quickly."
Elsewhere, MSCI's broadest index of Asia-Pacific shares outside
Japan fell 1%.
Gold climbed to a record $2,397.1, bringing its gain this week to
2.9%.
Crude oil prices rose after Iran said it would retaliate for a
suspected Israeli airstrike on its embassy in Syria.
Brent crude futures added 1% to $90.60 a barrel, while U.S. West
Texas Intermediate crude futures gained 1.1% to $85.99.
(Reporting by Naomi Rovnick amd Kevin Buckland; Editing by
Jacqueline Wong, Angus MacSwan and David Holmes)
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