CEO Morning Brief

World Stocks at Record High After Cautious ECB Rate Cut

Publish date: Fri, 07 Jun 2024, 10:52 PM
TheEdge CEO Morning Brief

NEW YORK/LONDON (June 6): World stocks hit an all-time high and the euro rose on Thursday after the European Central Bank cut interest rates for the first time in nearly five years, but also signalled that further moves could take a while.

ECB policymakers duly delivered their widely-flagged quarter-point cut to 3.75%, but markets were left feeling a little deflated after the bank also said it now did not expect inflation to fall back to target until 2026.

It was enough to snip the pan-European STOXX 600's gains back to 0.6%, while the euro inched up to almost US$1.0890 against the dollar and government bond yields — which reflect borrowing costs and move inversely to price — ticked up too.

MSCI's 47-country main world index rose as much as 0.3% to a record high. On Wall Street, the S&P 500 index was flat near an all-time high, the Dow Jones Industrial Average added 0.4%, while the Nasdaq Composite Index dipped 0.1%, also from an all-time high.

Chipmaker Nvidia fell 0.8% from a record high, after crossing US$3 trillion (RM14.1 trillion) in market valuation in the previous session.

"The focus for markets (now) is whether they will find room to cut in September," Saltmarsh Economics' Marchel Alexandrovich said.

He said it wasn't a surprise that inflation forecasts had been revised up. "Inflation is proving sticky and that makes it difficult."

The euro's gain, after a 2% rise over the last month, took it to US$1.0888, although most traders were sitting on their hands, with president Christine Lagarde stressing at the start of her post-meeting press conference: "We are not pre-committing to a particular rate path".

Stronger-than-expected data over the last few weeks, plus Thursday's increase in the ECB's in-house inflation forecasts, have raised doubts about how many more cuts will be justified this year.

"This was a cautious cut," said Samuel Zief, head of global FX strategy at JPMorgan Private Bank. "We currently think that September could be next. But (there is) no reason to expect significant reductions any time soon with growth actually picking up steam of late."

Goldilock story

The Bank of Canada pipped the ECB to become the first G7 country to cut rates in this cycle on Wednesday. The US Federal Reserve meets next week, although is not expected to move until September, at the earliest.

"This move ahead of the Fed was not at all obvious just three months ago," said Eric Vanraes, the head of fixed income at Eric Sturdza Investments. "We still believe that the first rate cut will come before the fourth quarter, in September."

By contrast, the debate at the Bank of Japan, which meets the week after, will be about whether to raise rates, and when.

Canada's dollar trimmed some of the losses from its post-cut dip on Thursday to stand at C$1.37 per US dollar.

In the bond markets, Germany's two-year government bond yield, which is sensitive to policy rate expectations, was up nearly five bp at 3.027%. It hit 3.125% last Friday, its highest since mid-November.

Benchmark 10-year US Treasury yields were a touch higher at 4.3045%, although that was still near their lowest in two months, after data this week hinted that the US labour market is finally cooling.

That included private US payrolls on Wednesday and a report on Tuesday that showed job openings fell in April to their 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 US non-farm 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 as much as 1% to US$79.19 a barrel, while US West Texas Intermediate crude futures rose 1% to US$74.85.

Gold gained 0.3% to US$2,362.4 per ounce after a 1% rise previously, while the cryptocurrency bitcoin was at US$71,415, shuffling back towards March's record high.

Source: TheEdge - 7 Jun 2024

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