Global stocks rally, bond yields plunge after Fed hints at rate cuts
A gauge of global stock markets edged near this year’s peak while benchmark U.S. Treasury yields and the dollar dropped after the Federal Reserve signaled possible interest rate cuts later this year.
MSCI’s broadest index of Asia-Pacific shares outside Japan rose 0.2% while Japan’s Nikkei gained 0.5%.
The MSCI ACWI, which incorporates readings of 49 equity markets across the world, gained 0.2%, having recovered a large part of its losses made after U.S. President Donald Trump threatened new tariffs on all of China’s imports last month.
Signs that China and the United States are returning to the negotiating table after a six-week hiatus also bolstered risk sentiment.
The rally in stocks comes as a host of Asian central banks are scheduled to hold policy meetings later in the day, with most expected to flag moves toward looser monetary settings.
On Wall Street, the S&P 500 gained 0.3% to 2,926, just 19 points off its record closing high hit on April 30.
The U.S. Federal Reserve said on Wednesday it was ready to battle growing global and domestic economic risks with interest rate cuts beginning as early as next month, as it took stock of rising trade tensions and growing concerns about weak inflation.
The bulk of Fed policymakers slashed their rate outlook for the rest of the year by roughly half a percentage point, and Fed Chairman Jerome Powell said others agree the case for lower rates is building.
Many investors viewed the overall tone as more dovish than their expectations, sending the 10-year U.S. Treasuries yield to as low as 1.986%, its lowest level since November 2016.
The two-year yield fell to 1.721%, a level last seen in November 2017.
Money market derivatives, such as Fed funds futures and overnight indexed swaps, are fully pricing in a rate cut of 25 basis points at next policy review on July 30-31, with about one-third chance of a bigger 50 basis point cut.
A total of 75 basis point reduction is priced in by the end of year.
However, such aggressive rate cuts when the stock prices are so close to record peaks would be rare, if not unprecedented, making some investors nervous about whether the Fed may be over-reacting.
“It seems the Fed is getting ahead of risk and doing whatever it takes to avoid downside implications due to a potential slowdown,” said Robin Anderson, senior global economist at Principal Global Investors in Des Moines, Iowa in the United States. “However, in the event inflation picks backs up, I’m apprehensive the Fed could be behind the curve if rates do in fact get cut too soon.”
Many investors think rate cut expectations could be rolled back if Washington and Beijing make some headway in their talks.
“While we expect ‘insurance’ rate cuts this year, we think the timing and magnitude of any policy easing is uncertain and somewhat dependent on U.S.-China trade relations,” said Andrew Wilson, CEO of Goldman Sachs Asset Management for EMEA and global Head of fixed income.
U.S. Trade Representative Robert Lighthizer said he will confer with his Chinese counterpart Vice Premier Liu He before next week’s meeting between President Donald Trump and Chinese President Xi Jinping in Osaka.
The Chinese yuan has recovered over the past couple of days on hopes of U.S.-China talks next week on the sideline of Group of 20 summit.
The offshore yuan traded at 6.8911 to the dollar, having hit a five-week high of 6.8880 overnight.
The euro bounced to $1.1254 after the Fed’s dovish signals undermined the dollar’s yield attraction, pushing the common currency away from this week’s low of $1.1181 touched on Tuesday.
The dollar hit a five-month low of 107.72 yen. The Bank of Japan is widely expected to keep its policy on hold on Thursday.
The British pound rebounded to $1.2648 from Tuesday’s 5-1/2-month low of $1.2507 as investors trimmed their short bets before the Bank of England’s policy meeting on Thursday where it may strike a more hawkish tone than those of its peers.
Gold also shot up to as high as $1,362.20 per ounce, the highest level since April last year.
Oil prices held firm, underpinned by a larger-than-expected decline in U.S. crude inventories.
U.S. West Texas Intermediate (WTI) crude futures rose 1.25% to $54.43 a barrel.
Members of the Organization of the Petroleum Exporting Countries (OPEC) agreed to meet on July 1, followed by a meeting with non-OPEC allies on July 2, after weeks of wrangling over dates.
Oil producers will discuss whether to extend a deal on cutting 1.2 million barrels per day of production that runs out this month.