LDN - Business

Europe rallies ahead of first ECB rate cut in nearly 5 years

[June 06, 2024] By Marc Jones

LONDON (Reuters) - World stocks were on the brink of an all-time high and the euro rose on Thursday ahead of what was widely expected to be the European Central Bank's first interest rate cut in nearly five years.

With the long-awaited moment about to arrive, traders pushed the pan-European STOXX 600 up 0.8% and watched the MSCI 47-country main world index trade within a point of a seemingly inevitable new peak.

Sentiment was almost at frenzy stage again. Wall Street's S&P 500 and Nasdaq had both set records on Wednesday after a now $3-trillion AI juggernaut Nvidia swept past Apple to become the world's second-most valuable company, behind Microsoft.

The euro was on the rise again. It added another 0.1% to its 2% rise over the last month to reach just shy of $1.0880, although most traders were sitting on their hands, waiting to see what the ECB signals later.

All 82 economists polled by Reuters expect the Frankfurt-based central bank to trim its key rate to 3.75% from the record high 4.0% level it has been at since September, but what it does after that remains subject to much debate.

EU elections happen in the coming days but stronger-than-expected data over the last few weeks has raised doubts about how many more cuts will be justified this year.

Euro zone inflation rose more than predicted in May, fueled by price growth in the services sector, which some policymakers single out as especially relevant because it reflects domestic demand.

This was likely to mirror larger-than-expected increases in wages in the first quarter of the year, which boosted consumers' battered disposable income after years of below-inflation pay hikes.

Michael Metcalfe, head of global macro strategy at State Street Global Markets, said for this meeting though, it was hard to remember a central bank move more well flagged in advance.

"Maybe today is going to mark something of a watershed as they (ECB) are not going to be able to be as clear with their forward guidance," Metcalfe said

Considering the recent robust data, "what follows is now a much harder question for markets - and the ECB - to assess," he added. "It could be a classic buy-the-rumor-sell-the-fact and the euro get some support from here."

GOLDILOCKS STORY

The Bank of Canada pipped the ECB to being the first G7 country to cut rates in this cycle on Wednesday. The U.S. Federal Reserve meets next week, although is not expected to move until September. By contrast, the debate at the Bank of Japan, which meets the week after, will be on if, and when, to raise rates.

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The Euronext logo is seen at the financial and business district of La Defense in Paris, France, November 10, 2020. REUTERS/Benoit Tessier/File Photo

Canada's dollar trimmed some of the losses from its post-cut dip on Thursday to leave it at C$1.3686 per U.S. dollar.

In the bond markets, Germany's 2-year government bond yield, which is sensitive to policy rate expectations, was down 1 bp at 2.987%. It hit 3.125% on Friday last week, its highest since mid-November.

Benchmark 10-year U.S. Treasury yields were sitting near their lowest in two months, after data this week hinted that the U.S. labor market is finally cooling.

That included private U.S. payrolls on Wednesday and a report on Tuesday that showed job openings fell in April to the lowest in more than three years.

Markets are now pricing nearly two quarter-point Fed cuts again this year, with a September move seen as a 68% chance compared to 47.5% last week.

"We're still in the Goldilocks range, so bad economic news has been good for equities, as Fed rate cuts are back on the table," said Ben Bennett, Asia-Pacific investment strategist at Legal and General Investment Management.

Investor attention will soon turn to the U.S. nonfarm payroll report for May on Friday, with a Reuters poll of economists expecting it to have risen by 185,000 jobs.

"We need that to be around 100-150k to maintain the Goldilocks narrative," Bennett said. "Much higher than that and yields could move back up, but if we get zero or negative, then we could be talking about a hard landing again."

In commodities, Brent crude futures rose 0.5% to $74.75 a barrel, while U.S. West Texas Intermediate crude futures rose 0.4% to $78.74. [O/R]

Spot gold rose 0.25% to $2,360 per ounce after a 1% rise previously, while silver rose 1% to $30.31 per ounce. [GOL/]

(Additional reporting by Ankur Banerjee in Singapore; Editing by Christina Fincher and Angus MacSwan)

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