Fed’s dovish tone lifts global shares
Risk-on trade drives equities to their highest in more than two weeks, as European stocks join a global rally and core bond yields fall
London — A more dovish tone from Federal Reserve chair Jerome Powell helped to revive risk appetite on Thursday, driving world stocks to their highest in more than two weeks, as European equities joined a global rally and core bond yields fell.
European stocks rallied, with the leading eurozone index up 0.8%, and tech, mining and autos sectors — the worst hit by recent losses — scoring the biggest gains.
Yields on German bonds fell, tracking a decline in US treasury yields, after Powell said on Wednesday that US interest rates were “just below” neutral, less than two months after saying rates were probably “a long way” from that point.
“Given the volatility you’ve seen recently, it’s probably quite reasonable to expect a little bit of a bounce. That being said, given the headwinds out there I can’t see it being sustained,” said Gary Waite, portfolio manager at Walker Crips in London.
Powell’s comments triggered a rally in US stocks and pushed the US treasury 10-year bond yield as low as 3.01% on Thursday, its lowest level since mid-September and down from this month's high of 3.25%.
The yield on two-year treasury bonds fell for the third consecutive session.
The dollar, which has outperformed bonds and the S&P 500 this year thanks to rising yields and trade tariffs, fell back on Powell’s comments. The dollar index inched down to 96.731 following an overnight loss of 0.6%.
In Europe, Italy’s government bond yields also dipped ahead of an auction of five- and 10-year bonds. Demand is expected to much stronger than at last week’s BTP Italia deal targeting retail investors.
Italy’s five-year bond yield dipped four basis points (bps) to 2.36% and the closely watched spread over Germany was at 294 bps.
Italian debt has rallied this week as the government said it was ready to compromise with the EU on its budget deficit target.
European stock gains came on the heels of a broadly positive session in Asia.
MSCI’s broadest index of Asia-Pacific shares outside Japan rose 0.6%, although the Shanghai Composite index slipped 1%.
Gains were tempered by investor jitters before trade talks between US President Donald Trump and Chinese President Xi Jinping on Saturday, during the Group of 20 (G20) summit in Argentina.
Analysts saw a chance of a knee-jerk rally in markets on any signs of progress, although substantive concessions would be needed for a more sustained recovery.
“Trade détente at the G20 is unlikely but it’s not priced. Even with EM [emerging markets] recouping relative performance since early October, a pretty severe trade downturn still looks priced in,” said Citi analysts.
Key to markets will be whether Xi can persuade Trump to postpone a sharp tariff hike on Chinese goods due to take effect on January 1.
In currencies, the euro edged 0.04% higher at $1.1370 after advancing 0.7% the previous day.
Sterling lost 0.4% to $1.2771 against the dollar after Bank of England governor Mark Carney warned a disorderly Brexit could trigger a worse economic downturn for the UK than the financial crisis.
In commodities, oil prices regained some ground from losses in the previous session, but an increase in US crude inventories and uncertainty in the run to an Opec meeting next week kept markets under pressure.
US crude futures were up 0.3% at $50.41 a barrel after sliding 2.5% the previous day.
Brent crude rose 0.2% to $59.69 a barrel. It has slumped 21% this month, during which it fell to a 13-month trough of $58.41.
Emerging market stocks hit a three-week high, with the index up 0.7% as investors bought back into risky assets.