Global Shares Rise as Fed Rate Cut Bets Weigh on Dollar

 

European stocks rose on Tuesday while the US dollar remained under pressure, as investors anticipated a potentially aggressive rate cut from the US Federal Reserve (Fed). With the Fed expected to begin its easing cycle, markets have increasingly priced in the possibility of a 50-basis-point rate cut.

Futures markets have fully priced in a quarter-point cut and now show nearly a 70% probability of a half-percentage-point rate cut on Wednesday, up sharply from around a 15% chance last week. This shift comes after multiple media reports suggested more aggressive monetary easing.

The prospect of a deeper rate cut has boosted risky assets and driven down the dollar and bond yields. "It's back to the Fed put," said Eddie Kennedy, head of discretionary fund management at Marlborough Investment Management. "Everyone's pricing in the soft landing... Generally, stocks have done well in such environments."

The pan-European STOXX 600 was up 0.5% to a two-week high, while Germany's DAX, Britain's FTSE 100, and France's CAC 40 all rose between 0.3% and 0.7%. MSCI's broadest index of Asia-Pacific shares increased by 0.6%, and S&P 500 futures and Nasdaq futures edged up as well.

Global equities, represented by MSCI's gauge, rose 0.1%. Neil Shearing, group chief economist at Capital Economics, argued that a 50bps rate cut may be considered if officials believe current rates pose risks to the economy by staying in restrictive territory for too long. However, he cautioned that such a move could give the impression that central bankers have "fallen behind the curve."

The two-year US Treasury yield, reflecting near-term rate expectations, was last at 3.5527%, down from a two-year low of 3.528%. The benchmark 10-year yield remained relatively steady at 3.6157%.

Rate Decisions Across the Globe

The Bank of England (BOE) and the Bank of Japan (BOJ) are also set to meet this week, with both expected to keep rates on hold. In contrast, the Fed's anticipated aggressive rate cut has kept sterling supported at US$1.3216, near its highest level since March 2022.

The BOJ, having raised interest rates twice this year, is also expected to hold off further action this week. The recent decline in US Treasury yields and expectations that the BOJ might need to tighten policy further have bolstered the yen against the dollar. The yen was last trading at 140.61 per dollar, close to its strongest level in a year reached on Monday.

However, the stronger yen has raised concerns about Japanese exporters' earnings, leading to a 1% drop in Tokyo's Nikkei index as the market returned from a national holiday.

Asian Markets and Oil Prices

Elsewhere in Asia, concerns over China's economic recovery continued to weigh on sentiment. Data showed China's industrial output growth slowed to a five-month low in August, with retail sales and new home prices also weakening.

Despite concerns over weakening Chinese demand for oil, prices remained stable due to the ongoing impact of Hurricane Francine on output in the US Gulf of Mexico. Brent crude futures held steady at US$72.58 per barrel, while US crude futures were flat at US$70.04 per barrel. Spot gold was also little changed at US$2,582.52 per ounce.