Stocks near four-month high as interest rate cut bets grow: Markets Wrap

(Bloomberg) — Stock markets rose as traders increased bets and central bankers prepared a global policy shift toward interest rate cuts. Bonds paused a rally that sent the 10-year U.S. Treasury yield falling below 4.2%.

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The Stoxx 600 index traded near its highest level in four months, while U.S. stock futures rose. Merck KGaA slumped 13% after the failure of its evobrutiniban trial dealt a blow to the German company’s plans to develop another blockbuster drug.

Traders are now debating the staying power of a rally based on hopes of a drastic policy reversal. Recent dovish comments from central bankers may not equate to assurances that they are preparing for a shift to loose monetary policy, Craig Erlam, senior market analyst at Oanda, wrote in a note to clients. Overused technicals and a belief that the Fed won’t cut interest rates as quickly as markets expect have led to bearish warnings from Wall Street heavyweights.

“It is now clear that there will be a significant shift away from central banks,” Erlam wrote. “Whether that will be enough to achieve the tipping point that has been so much talked about this year could well determine whether markets continue to price in a rate cut in March, as a turnaround of this magnitude needs to be clear.”

It was measures in Europe that triggered the latest rise in bonds after the European Central Bank’s toughest officials said on Tuesday that inflation was showing a “remarkable” slowdown. The rally was boosted by weaker-than-expected U.S. jobs data, suggesting inflationary wage pressures are easing and giving the Federal Reserve room to start cutting interest rates.

A government debt index that excludes Treasury bonds rose to its highest level since April 2022 as interest rate traders bet the ECB will cut interest rates before the Fed. U.S. Treasury bonds are also poised for their first annual gain in three years as bond investors brace for an end to the economic resilience that has made 2023 so challenging.

The story goes on

Markets have now fully priced in six quarter-point interest rate cuts from the ECB in 2024 for the first time, a move that would cut the key interest rate by 150 basis points to 2.5%. There is also a nearly 90% chance that the easing cycle will begin in the first quarter of next year, a scenario that was barely considered three weeks ago.

The global bond rally is gaining momentum as bets on interest rate cuts are popping up everywhere

Important events this week:

  • US ADP wage and trade balance, Wednesday

  • CEOs of Wall Street’s biggest banks, including JPMorgan, Citigroup, Goldman Sachs, Morgan Stanley and Bank of America, are expected to testify about regulatory oversight before the Senate Banking Committee on Wednesday

  • Bank of Canada monetary policy meeting, Wednesday

  • The Bank of England publishes a stability report on Britain’s financial system every two years and is holding a press conference on Wednesday

  • China trade, foreign exchange reserves, Thursday

  • Eurozone GDP, Thursday

  • Germany’s industrial production, Thursday

  • US wholesale inventories, initial jobless claims, Thursday

  • Germany CPI, Friday

  • Japanese household spending, GDP, Friday

  • Andrea Brischetto, head of financial stability at the Reserve Bank of Australia, speaks at the Sydney Banking and Financial Stability conference on Friday

  • U.S. jobs report, University of Michigan consumer sentiment, Friday

Some of the key moves in the markets:

Shares

  • The Stoxx Europe 600 was up 0.2% at 10:29 a.m. London time

  • S&P 500 futures rose 0.2%

  • Nasdaq 100 futures rose 0.3%

  • The futures on the Dow Jones Industrial Average hardly changed

  • The MSCI Asia Pacific Index rose 1%

  • The MSCI Emerging Markets Index rose 0.3%

Currencies

  • The Bloomberg Dollar Spot Index was little changed

  • The euro was little changed at $1.0790

  • The Japanese yen fell 0.2% to 147.39 per dollar

  • The offshore yuan was little changed at 7.1676 per dollar

  • The British pound was little changed at $1.2601

Cryptocurrencies

  • Bitcoin rose 0.7% to $44,228.38

  • Ether rose 0.5% to $2,285.37

Tie up

  • The 10-year Treasury yield rose three basis points to 4.19%

  • The 10-year German government bond yield rose two basis points to 2.27%

  • The 10-year UK government bond yield rose four basis points to 4.06%

raw materials

  • Brent crude fell 0.8% to $76.62 a barrel

  • Spot gold rose 0.2% to $2,022.73 an ounce

This story was produced with support from Bloomberg Automation.

– With assistance from Farah Elbahrawy and Garfield Reynolds.

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©2023 Bloomberg LP


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