LONDON,– European stocks rose on Tuesday, while the U.S. dollar weakened, as investors awaited the U.S. Federal Reserve’s anticipated rate cut, which could signal the start of an easing cycle. Markets are increasingly betting on a larger-than-expected rate reduction in response to recent economic signals.
Investor focus has shifted to Wednesday’s Fed decision, with rising odds of a 50-basis-point rate cut. Futures markets, which had previously fully priced in a 25-basis-point cut, now suggest a nearly 70% chance of a more aggressive 50-basis-point cut, up from just 15% last week. This shift follows a series of media reports highlighting the potential for deeper easing measures.
The market’s repricing in favor of a larger rate cut has bolstered riskier assets and pushed the dollar and bond yields lower. “It’s back to the Fed put,” said Eddie Kennedy, head of bespoke discretionary fund management at Marlborough Investment Management. “Everyone’s pricing in the soft landing, and it feels like the Fed has been quite transparent that we are entering a rate-cutting environment. Historically, stocks have performed well after such moves.”
In Europe, the pan-European STOXX 600 index climbed 0.5% to a two-week high, while Germany’s DAX, Britain’s FTSE 100, and France’s CAC 40 gained between 0.3% and 0.7%. Meanwhile, MSCI’s broadest index of Asia-Pacific shares rose 0.6%, and U.S. S&P 500 and Nasdaq futures both edged higher.
Neil Shearing, group chief economist at Capital Economics, noted that a 50-basis-point cut may be warranted given that U.S. rates remain above most estimates of neutral. “If officials judge that keeping policy restrictive for too long poses unnecessary risks to the economy, there is no reason to delay,” he said. However, Shearing warned that such a significant cut early in the easing cycle could signal that central bankers have fallen behind economic trends.
Markets have priced in approximately 120 basis points of rate cuts by the end of the year. The two-year U.S. Treasury yield, which reflects near-term rate expectations, dropped to 3.5527%, close to a two-year low.
Other Key Rate Decisions This Week
The Bank of England (BoE) and the Bank of Japan (BOJ) are also set to meet this week. Both central banks are expected to keep their rates unchanged. The BoE’s stance of less aggressive easing compared to the Fed has helped support the British pound, which held steady at $1.3216, not far from its August high of $1.3269.
The BOJ, which has raised interest rates twice this year, is also likely to hold rates steady. The recent decline in U.S. Treasury yields and expectations that the BOJ may tighten policy further have strengthened the Japanese yen against the dollar. The yen traded at 140.61 per dollar, near its strongest level in a year.
Despite the stronger yen, concerns over its impact on Japanese exporters dragged Tokyo’s Nikkei down 1% on Tuesday after reopening from a national holiday.
In China, weak economic data continues to weigh on sentiment. Over the weekend, data showed industrial output growth slowed to a five-month low in August, with retail sales and new home prices also weakening.
Commodities
Oil prices remained steady despite concerns over China’s faltering economic recovery. The ongoing disruption to output in the U.S. Gulf of Mexico due to Hurricane Francine offset worries about weaker Chinese demand. Brent crude futures held at $72.58 a barrel, while U.S. crude was unchanged at $70.04 per barrel.
Spot gold remained steady at $2,582.52 per ounce.
Source: Reuters