Mark Jones
LONDON (Reuters) – Global stocks were on the verge of all-time highs and the euro rose on Thursday ahead of what was widely expected to be the European Central Bank’s first interest rate cut in nearly five years.
With the long-awaited moment about to arrive, traders pushed the pan-European index up 0.3% in early trade and watched as MSCI’s main 47-nation world index edged toward a seemingly inevitable new peak.
The mood again reached an almost frantic stage. Wall Street and the Nasdaq set new records Wednesday after $3 trillion artificial intelligence giant Nvidia (NASDAQ:) overtook Apple (NASDAQ:) to become the world’s second-largest company behind Microsoft (NASDAQ:).
The euro also began to rise again. It added another 0.1% to its 2% rise over the past month to nearly hit $1.0880, although most traders sat on their hands waiting for a signal from the ECB later.
All 82 economists polled by Reuters expect the Frankfurt-headquartered central bank to cut its key rate to 3.75% from the record high of 4.0% it has been at since September, but that it will do after this remains the subject of much debate.
EU elections are due in the coming days, but stronger-than-expected data over the past few weeks has raised doubts about how many more cuts will be warranted this year.
Eurozone inflation rose more than expected in May, helped by rising prices in the services sector, which some policymakers see as particularly pressing because it reflects domestic demand.
This likely reflected stronger-than-expected wage growth in the first quarter of the year, which added to the decline in consumers’ disposable income after several years of below-inflation wage increases.
Michael Metcalfe, head of global macro strategy for the company State Street (NYSE:) Global Markets officials, however, said at the meeting that it was difficult to recall any central bank action that was more clearly outlined in advance.
“Today may be a bit of a tipping point because they (the ECB) won’t be able to be as clear in their guidance going forward,” Metcalfe said.
Given the recent robust data, “what follows is now a much more difficult issue for markets – and the ECB – to assess,” he added. “It could be a classic ‘buy the rumor, sell the fact’ strategy and the euro will get some support from here.”
HISTORY OF GOLDEN LAKE
The Bank of Canada named the ECB the first G7 country to cut rates this cycle on Wednesday. The US Federal Reserve will meet next week, although it is not expected to act until September. By contrast, the Bank of Japan’s debate next week will focus on whether and when to raise rates.
The Canadian dollar pared some of its losses from Thursday’s decline to remain at C$1.3679 per U.S. dollar.
In bond markets, German two-year government bond yields, which are sensitive to interest rate expectations, fell 0.5 bps. up to 2.98%. It hit 3.125% on Friday, its highest level since mid-November.
Yields on 10-year US Treasuries hovered near their lowest levels in two months after data this week hinted that the US labor market was finally cooling.
These included U.S. private sector employment data on Wednesday and a report on Tuesday that showed job openings fell to their lowest level in more than three years in April.
Markets are now expecting almost two full 25 basis point Fed rate cuts this year, with the likelihood of a September move seen as 68%, up from 47.5% last week.
“We’re still in the Goldilocks range, so the bad economic news has been good for stocks as Fed rate cuts are back on the table,” said Ben Bennett, Asia-Pacific investment strategist at Legal And General Investment Management.
Investors’ attention will soon turn to the US non-farm payrolls report for May, due out on Friday. Jobs are expected to increase by 185,000, according to a Reuters poll of economists.
“We need that number to be around 100,000 to 150,000 to support the Goldilocks narrative,” Bennett said. “Much above that level and yields could rise again, but if we get zero or negative then we could be talking about a hard landing again.”
Commodity futures rose 0.48% to $78.79 a barrel and U.S. West Texas Intermediate crude futures rose 0.63% to $74.54. [O/R]
rose 0.59% to $2,369 an ounce after rising 1% earlier, while silver rose 1.34% to $30.41 an ounce. [GOL/]