Stocks enjoy a bounce from rate-cut fever

[May 10, 2024]  By Amanda Cooper

LONDON (Reuters) -Global shares rose to one-month highs on Friday while the dollar held steady, giving commodities a boost, after softer U.S. jobs data gave investors confidence that interest rates will start to decline this year.

In currencies, the pound headed for a modest weekly loss after the Bank of England (BoE) on Thursday paved the way for the start of rate cuts as soon as next month, while data showed the UK economy exited a mild recession in the first quarter of this year.

The MSCI All-World index was up 0.13%, as equities in Asia and Europe took their lead from a rally on Wall Street overnight, after data showed the number of people filing for jobless benefits for the first time rose more than expected, suggesting the U.S. economy is beginning to slow.

But rather than putting the brakes on the stock market, the numbers are giving investors confidence in the ability of the Federal Reserve to cut interest rates this year, as central banks in Europe have started to lower borrowing costs.

The STOXX 600 rose 0.9% towards record highs on Friday, heading for one of its strongest weekly performances this year. U.S. stock futures were up 0.4-0.5%.

"What could have been a crack in the overall market bullishness appearing has turned into an opportunity to get long again and that's what we're seeing now in May," David Morrison, market strategist at Trade Nation, said.

Thursday's weekly jobless data followed last week's report that showed U.S. job growth slowed more than expected in April and the increase in annual wages fell below 4.0% for the first time in nearly three years.

INFLATION AHEAD

Markets will be closely watching April U.S. producer price index and the consumer price index out next week for signs that inflation has resumed its downward trend towards the Federal Reserve's 2% target rate.
 

Hotter-than-expected inflation reports last month quashed any lingering expectations of near-term U.S. rate cuts. Markets are now fully pricing in a cut only in November though there is still a chance of the Fed moving in September.

In contrast, markets now imply a 50-50 chance of a BoE cut in June and are almost fully priced for August. They also imply an 88% chance the European Central Bank will ease in June.

A passerby walks past an electric monitor displaying various countries' stock price index outside a bank in Tokyo, Japan, March 22, 2023. REUTERS/Issei Kato/File Photo

BOE Governor Andrew Bailey said there could be more reductions than investors expect, the latest sign of the growing divergence between Europe and U.S. rate outlook.

Sterling was steady at $1.2534, having touched a more than two-week low of $1.2446 on Thursday.

Traders currently anticipate roughly 45 basis points of cuts this year from the Fed. In comparison, traders are pricing in 58 bps of easing from the BoE this year, while anticipating 70 bps of cuts from the ECB.

The dollar index, which measures the U.S. currency versus six others, was flat at 105.22, as the euro held steady at $1.0784, set for its fourth straight week of gains on the dollar.

The yen remains in focus after last week's suspected rounds of interventions from Japanese authorities totalling nearly $60 billion aimed at pulling the yen off its 34-year lows of 106.245 per dollar touched on April 29.

On Friday, the yen was last at 155.70 per dollar, with Japan's Finance Minister Shunichi Suzuki repeating Tokyo's recent warnings that it was ready to take action against disorderly currency moves.

Ben Bennett, Asia-Pacific investment strategist at Legal And General Investment Management, said the Ministry of Finance wants to avoid spikes in volatility which could negatively impact domestic financial markets.

"So like we suspect a few days ago, they will intervene if intraday moves become too large. But I don't think they'll push against a steady depreciation, like we've seen since."

With the dollar taking a breather, commodities pushed higher. Brent crude futures were up 0.4% at $84.19 a barrel, while copper futures rose 2.1% to $10,105 a tonne and gold rose 1.1% to $2,371 an ounce.

(Reporting by Ankur Banerjee; Editing by Shri Navaratnam, Himani Sarkar and Ros Russell)

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