Dovish Fed Spurs Stock, Bond Rally On Easing Bets: Markets Wrap

Stocks and bonds rallied after the Federal Reserve signaled interest-rate cuts next year, unleashing a bullish pulse across markets amid optimism that inflation pressures are easing.

Europe’s Stoxx 600 index surged as much as 1.7%, with rates-sensitive real estate stocks and beaten-down miners leading the gains. Shares in Germany and France hit fresh all-time peaks. Nasdaq 100 futures climbed, setting up the underlying tech-heavy index for an attempt at a record close. S&P 500 contracts edged higher after the benchmark ended within 2% of its record high on Wednesday.

The risk-on rush follows a pivot to looser policy by the Fed, which held rates steady Wednesday and forecast that their next moves would be lower. The dot plot showed 75 basis points of reductions in 2024 — a sharper pace of easing than indicated in September. Traders are even more optimistic, betting on cuts of twice that magnitude.

“There’s been a lot of debate in recent weeks about whether investors are getting ahead of themselves, too optimistic about how quickly the Fed will cut rates — but the message from the central bank is that is not the case,” said Craig Erlam, senior market analyst at Oanda.

Attention turns next to today’s Bank of England and European Central Bank meetings for evidence of whether developed-market peers are on the cusp of a global easing cycle. Traders are pricing in six quarter-point ECB rate cuts in 2024 and five by the BOE.

Treasuries extended the sharp rally that followed the Fed meeting, with the 10-year yield falling below 4% for the first time since August. Yields on the policy-sensitive two-year note fell nine basis points. Government bonds in the UK and Germany also jumped.

The dollar dropped to a four-month low, extending its losses from Wednesday. The yen climbed by more than 1%, with the Bank of Japan tipped to be a policy outlier by scrapping the world’s last negative interest rate.

Readings on US retail sales and initial jobless claims later Thursday will provide an early test of the buoyant mood among investors. Traders would be concerned by any surprises in the data that cloud the view that the surge in inflation has been contained without a significant cost to employment.

Elsewhere on the monetary policy front, the Norwegian krone strengthened to the highest level against the euro since October after Norges Bank unexpectedly raised its key rate to 4.5% and said it’s likely to be kept at this level for some time to curb still too-high inflation. Meanwhile, the Swiss National Bank kept borrowing costs unchanged and dropped a reference to possible further hikes after inflation slowed below its ceiling.

In individual company news, Vivendi SE soared as much as 12% in Paris as French billionaire Vincent Bolloré weighs a breakup of his sprawling media and entertainment empire.

Apple Inc. edged higher in US premarket trading, after closing at a record high on Wednesday. The iPhone maker has surged 50% in 2023 and its market value is approaching that of Europe’s largest stock market: France. The combined market value of companies listed in Paris was about $3.2 trillion as of Wednesday’s close versus the technology giant’s $3.1 trillion.

In commodities, oil advanced from a five-month low on positive demand signals including a drop in US inventories and the potential for rate cuts by the Fed.

Key events this week:

• European Central Bank policy meeting followed by news conference with ECB President Christine Lagarde, Thursday
• Bank of England policy meeting, Thursday
• US initial jobless claims, retail sales, business inventories, Thursday
• China 1-yr MLF rate and volume, property prices, retail sales, industrial production, jobless rate, Friday
• Eurozone S&P Global Manufacturing PMI, S&P Global Services PMI, Friday
• US industrial production, Empire manufacturing, S&P Global US Manufacturing PMI, Friday

Some of the main moves in markets:

Stocks

• The Stoxx Europe 600 rose 1.6% as of 10:34 a.m. London time
• S&P 500 futures rose 0.3%
• Nasdaq 100 futures rose 0.4%
• Futures on the Dow Jones Industrial Average rose 0.2%
• The MSCI Asia Pacific Index rose 1.6%
• The MSCI Emerging Markets Index rose 1.5%

Currencies

• The Bloomberg Dollar Spot Index fell 0.4%
• The euro rose 0.3% to $1.0908
• The Japanese yen rose 0.9% to 141.61 per dollar
• The offshore yuan was little changed at 7.1429 per dollar
• The British pound rose 0.3% to $1.2660

Cryptocurrencies

• Bitcoin fell 0.2% to $42,888.41
• Ether rose 0.9% to $2,282.47

Bonds

• The yield on 10-year Treasuries declined seven basis points to 3.95%
• Germany’s 10-year yield declined 11 basis points to 2.06%
• Britain’s 10-year yield declined 13 basis points to 3.70%

Commodities

• Brent crude rose 2.1% to $75.81 a barrel
• Spot gold rose 0.3% to $2,034.40 an ounce

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