Stocks gain on rate-cut wagers as ECB meeting looms

[June 05, 2024]  By Danilo Masoni and Ankur Banerjee

MILAN (Reuters) - World shares rose on Wednesday and the dollar inched up, with a European Central Bank policy meeting coming into focus following soft U.S. labor market data that firmed up bets of a September rate cut by the Federal Reserve.

Worries about a cooling U.S. economy however kept risk appetite in check, holding many equity gauges anchored below this year's highs.

In Asia Indian markets stayed in focus, with stocks rising after Tuesday's plunge as voting results showed a slimmer-than-expected victory margin for PM Narendra Modi.

The ECB meets on Thursday, and money markets price in an almost certain chance of a first interest rate cut. However, there is uncertainty about the future path of euro zone rates.

"I have a positive view on tomorrow's cut because it marks the end of an era of rate hikes that began two years ago," said Carlo Franchini, head of institutional clients at Banca Ifigest.

"Now, we'll need to see the impact that rate cuts will have on domestic demand and the economic recovery."

Data on Wednesday showed euro zone business activity expanded at its quickest rate in a year in May as growth in the services industry outpaced a contraction in manufacturing.

Across the Atlantic, the Bank of Canada was expected to begin its easing cycle when it decides on policy later on Wednesday. The Fed meets on Tuesday and Wednesday next week.

The MSCI world equity index, which tracks shares in 49 countries, was up 0.1% by 1057 GMT, supported by a positive open in Europe and gains in Asia.

The pan-European STOXX 600 index was up 0.7% and the MSCI's broadest index of Asia-Pacific shares outside Japan rose more than 1%. The Nikkei in Tokyo fell 0.9% as renewed strength in the Japanese yen weighed.

Data on Tuesday showed U.S. job openings fell more than expected in April to the lowest in more than three years, a sign that labour market conditions are softening.

The data emboldened bets on Fed rate cuts this year, with markets pricing in 45 basis points of easing, helping Wall Street end up just slightly on Tuesday.

Traders are pricing in a 65% chance of a rate cut in September, compared with 46% a week earlier, the CME FedWatch tool showed.

"Economic data in America are frankly weakening. In the past, such data caused a robust repricing and then nice rallies in the stock market. Now, this is somewhat less so," said Giuseppe Sersale, portfolio manager at Anthilia.

A man walks past an electric screen displaying Japan's Nikkei share average and the current Japanese Yen exchange rate against the U.S. dollar outside a brokerage in Tokyo, Japan March 21, 2024. REUTERS/Issei Kato/ file photo

"The market seems to be shifting from a phase where it celebrated bad data to being a little afraid that the slowdown will be a little more pronounced. This explains why stocks have been moving sideways for several weeks now," he added.

Services ISM data for May due later on Wednesday will be watched by traders for more indications about the U.S. economy ahead of the crucial U.S payrolls report on Friday.

Wall Street futures pointed to gains of 0.2-0.4% for the S&P 500 and for the tech-heavy Nasdaq.

Benchmark 10-year note yields were at 4.3396% on Wednesday, after hitting an almost three-week low of 4.314% on Tuesday following the jobs data. [US/]

Germany's 10-year government bond yield, the benchmark for the euro zone, nudged lower to 2.527% after its sharpest two-day drop since March in the previous session.

The dollar index, which measures the U.S. currency against six peers, was 0.16% higher at 104.32, just above the near two-month low of 103.99 it hit on Tuesday. [FRX/]

The dollar's relentless strength in the recent past will make way for minor weakness over the next 12 months, showed a Reuters poll of strategists who generally agreed the dollar was overvalued.

The U.S. currency's retreat helped the yen strengthen to a more than two-week high of 154.55 per dollar on Tuesday. On Wednesday, it weakened to 156.08.

India's Nifty 50 rose 3.4% in volatile trading after sliding nearly 6% on Tuesday, its worst session in four years, with foreign investors selling roughly $1.5 billion of shares.

Modi's ruling Bharatiya Janata Party lost an outright majority in parliament for the first time in a decade and is dependent on its regional allies to get past the half-way mark required to run the world's largest democracy.

In commodities, oil prices were above four-month lows as traders weighed an OPEC+ decision to boost supply later this year and an increase in U.S. crude and fuel stocks.

Brent crude futures were last at 77.7 per barrel, up 0.3%, while U.S. West Texas Intermediate crude futures traded at $73.4 a barrel, up 0.25%. [O/R]

(Reporting by Danilo Masoni in Milan and Ankur Banerjee in Singapore; Editing by Christina Fincher and Jan Harvey)

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