Global shares gain on rate cut bets; yen weakens

Global shares gain on rate cut bets; yen weakens

By Herbert Lash and Nell Mackenzie

NEW YORK/LONDON (Reuters) -A gauge of global stock markets rose on Monday on optimism that major central banks will cut interest rates this year, while the yen weakened against the dollar after a strong surge last week from Japan’s suspected currency intervention.

Stocks on both sides of the Atlantic rose, with the three major indices on Wall Street in the green as a softer-than-expected U.S. labor market report last week slashed bets that the Federal Reserve might hike rates this year.

The dollar index, a measure of the U.S. currency against six major trading peers, was lower for a fourth straight session after data showed the lowest jobs gain since October, easing concerns the Fed would keep rates higher for longer.

Fed Chairman Jerome Powell “told the market that a hike was unlikely. Those were his words, ‘unlikely,’ and therefore they took that to mean that he wants to cut,” said Brad Conger, chief investment officer at Hirtle Callaghan & Co. in Conshohocken, Pennsylvania.

But the outlook on rates is still uncertain as the market hopes rates are restrictive enough to slow the economy and the pace of inflation, Conger said.

“That’s a tenuous linkage, IE, meaning it’s a leap of faith to believe that inflation goes away because activity slows down,” he said. “That’s the orthodox view.”

On Wall Street, the Dow Jones Industrial Average rose 0.17%, the S&P 500 gained 0.55% and the Nasdaq Composite advanced 0.60%.

In Europe, the pan-regional STOXX 600 also was positive, up 0.52%, on signs the European Central Bank is more confident about cutting rates as euro zone inflation continues to ease, three ECB policymakers said.

Philip Lane, Gediminas Simkus and Boris Vujcic said separately that the inflation and growth data cemented their belief that euro zone inflation, which was 2.4% in April, will slow to the central bank’s 2% target by the middle of next year.

MSCI’s gauge of stocks across the globe rose 0.54%.

The dollar held broadly steady, leaving the euro up 0.15% at $1.0774, while sterling strengthened 0.22% to $1.2571. In Europe, Goldman Sachs raised its 2024 EPS growth forecast for STOXX 600 companies to 6% from 3% earlier, the bank said in a note on Friday.

According to Goldman, a 10% annual rise in Brent prices adds about 2.5 percentage points to annual EPS growth, and a 10% weaker euro/dollar exchange rate adds about the same.

Treasury yields ticked higher as investors assessed last week’s subdued job creation, which reinforced view that the U.S. economy was not overheating enough to derail a rate cut.

The yield on benchmark U.S. 10-year notes rose 1.2 basis points to 4.512%, up from 4.5% late on Friday. Traders are now pricing in 48 basis points of Fed rate cuts by year end, with the first cut likely in September, according to LSEG’s rate probability app. In recent weeks, traders had priced in just one cut due to signs of sticky inflation.

With public holidays in the UK and Japan, markets in mainland China and Europe got off to an upbeat start also enjoying the glow from renewed U.S. optimism.

Oil prices were also in focus on the prospects of Saudi Arabian price hikes and rising tensions in the Middle East, with

U.S. crude up 0.56% to $78.55 a barrel and Brent higher at $83.39 per barrel, up 0.52% on the day.[O/R]

On Monday, Israel’s military called on Palestinian civilians to evacuate Rafah as part of a “limited scope” operation, but did not immediately confirm media reports this was part of preparation for a ground assault.

MSCI’s broadest index of Asia-Pacific shares outside Japan peaked at its highest level since February 2023 and closed 0.66% higher, while China’s blue-chip index ended up 1.5%.

Hong Kong’s Hang Seng Index rose 4.7% last week and on Friday clocked its longest daily winning streak since 2018, closing on Monday 0.55% higher.

INTERVENTION WATCH

Elsewhere, traders remained on alert for further volatility in the yen, after last week’s bouts of suspected intervention from Japanese authorities to stop a sharp slide in the currency.

Tokyo is suspected of having spent more than 9 trillion yen($59 billion) to support its currency last week, as suggested by data from Bank of Japan, taking the yen from a 34-year low of 160.245 per dollar to a roughly one-month high of 151.86 over the span of a week.

The yen gave back some of those gains on Monday and was last 0.63% lower against the greenback at 153.95 per dollar.

Spot gold added 0.9% to $2,322.19 an ounce.

Bitcoin gained 0.30% to $63,119.00.

(Reporting by Nell Mackenzie and Rae Wee; Additional reporting by Roshan Abraham; Editing by Gerry Doyle, Ed Osmond, Toby Chopra and Nick Macfie)