Stocks, bitcoin edge up as investors bank on Fed rate cuts

By Amanda Cooper

LONDON (Reuters) -Stocks in Europe edged up on Thursday, while the dollar held steady, as investor confidence in a Federal Reserve rate cut next month kept sentiment upbeat, which also helped keep bitcoin above its recent lows. 

A holiday-shortened week has limited some of the activity across markets. Stocks have kept a largely upbeat tone and currencies are much more sedate as investors shrug off AI bubble worries that had roiled equities earlier in November.

With U.S. markets closed for the Thanksgiving holiday, activity was more muted than usual across the major asset classes.

'THE MARKET'S KRYPTONITE'

European markets traded modestly higher, with the STOXX 600 index up 0.2%, led by gains in defence and tech companies that helped offset losses in healthcare stocks.

With a Fed rate cut largely seen as a near-certainty next month against the backdrop of an upbeat earnings season, the most likely direction for stocks is going to be upwards, analysts said. 

"As long as your main engine is going nicely, then a lot of the worries about valuations just get pushed up to the back foot for the time being, until something else comes along," IG chief markets strategist Chris Beauchamp said.

He added that the most likely catalyst to derail a rally would come in the form of renewed concern over spending on AI, as has been the case for weeks.

"That is the market's kryptonite at the moment," he said.

The dollar, meanwhile, held steady against a basket of currencies. Sterling retreated from near four-week highs hit on Wednesday after British finance minister Rachel Reeves' budget helped alleviate some concern about Britain's long-term finances. The pound was unchanged at $1.324, as was the euro at $1.1593.

DATA GAP CAN'T TEMPER RATE CUT EXPECTATIONS 

U.S. macro data is flowing again since the record 43-day government shutdown ended in mid-November, although most of the reports so far have been fairly out of date and offered very little insight into the current state of the economy.

This has left investors leaning more heavily on comments from Fed officials for some guidance on where interest rates might go in the coming months. A number of speakers in the last week, including San Francisco Federal Reserve Bank President Mary Daly and Fed Governor Christopher Waller, have boosted expectations for a December rate cut. 

Traders are now pricing in an 85% chance of a rate cut next month, compared with just 30% a week earlier, CME FedWatch showed.

ROUND-THE-CLOCK YEN VIGILANCE

In the currency market, the Japanese yen was in the spotlight, having strengthened to 156.375 per dollar from nearly 158 a week ago. Investors are watching for possible intervention from Tokyo after weeks of verbal jawboning from authorities to stem the currency's relentless slide.

Prime Minister Sanae Takaichi ruled out on Wednesday the possibility that Japan could face a British-style "Truss moment", or loss of market confidence stemming from her administration's spending plans. 

Sources told Reuters that the BOJ was preparing markets for a possible rate hike as soon as next month as it may take a more consistent rate hike path to alter the trajectory of the currency.

"There's a general feeling that Japanese policymakers will hold off from intervening unless (dollar/yen) were to rise to 158.00-160," David Morrison, senior market analyst at Trade Nation, said.

Bitcoin rose 0.7% to $90,800, set to break a four-week losing streak with a nearly 3% gain. Gold eased 0.1% to $4,159 an ounce. 

(Additional reporting by Ankur Banerjee in Singapore; Editing by Shri Navaratnam, Emelia Sithole-Matarise and Alex Richardson)