Picture: ISTOCK
Picture: ISTOCK

London — World stocks edged to their highest in 20 months on Thursday after the US Federal Reserve cut rates even as it signalled it would hold back from further reductions, sending bond yields and the dollar down.

MSCI's world equity index, which tracks shares in 47 countries, rose 0.05% to its highest since early February 2018, with many investors remaining expectant of further easing in spite of the Fed's slightly hawkish tone.

The US central bank on Wednesday cut rates by a quarter of a percentage point, its third reduction in 2019, to help sustain US growth in the face of slowdowns elsewhere in the world. Yet it signalled there would be no further reductions, barring economic shocks.

Asian stocks outside Japan had earlier forged ahead on the cuts, after Wall Street's advance to record highs, climbing 0.3% to touch their highest since July 30.

But the positive mood was tempered in Europe after a Bloomberg report that Chinese officials doubt a long-term trade deal with the US was possible, which sent shares into negative territory.

The broad Euro Stoxx 600 fell 0.5%, wiping out earlier gains, with auto and energy stocks slumping. German stocks, seen as heavily exposed to international trade, fell 0.7%.

Wall Street futures were down about 0.2%.

Fed chair Jerome Powell had given an upbeat assessment of the US economy on Wednesday, and said geopolitical risks from Washington's trade war with China to Brexit had eased.

Yet many investors held on to expectations that further rate cuts could come should the US economy turn sour in 2020, and on Thursday money moved to riskier assets.

“Markets are discounting some more easing, but not very aggressively at this stage,” said Klaus Baader, chief global economist at Societe Generale.

“We think the US is going slide into recession, and that is likely some time around the middle of 2020. If the economy slides into recession, we think the Fed will continue to cut interest rates aggressively — even though this isn't mainstream thinking.”

The dollar against a basket of six major currencies slipped 0.4% to 97.29, its lowest in a week, after rising a day earlier.

Eurozone bond yields also fell ahead of flash inflation and preliminary GDP figures that were due at 10am GMT, that would give insight into the health of the bloc.

German government bond yields, seen as a benchmark, were set for their biggest fall in October. US treasury yields dropped too, extending a fall from Wednesday, and were last down about three basis points on the day.

Emerging stocks rose 0.2% to their highest in three months, and were on course for a second straight month of healthy gains.

The US central bank had dropped a previous reference in its policy statement that it “will act as appropriate” to sustain the economic expansion — language that was considered a sign for future cuts.

Even so, market players said they thought the Fed could act should geopolitical risks flare up.

“I think the Fed is likely to remain in a wait-and-see position in the short term,” said Christophe Barraud, chief economist at Market Securities in Paris.

“If there is a big disappointment on the trade front, that would likely to lead to another wave of tariffs and a major risk for the US economy.”

Market complacency?

After the Fed cuts, the S&P 500 index closed at another record high on Wednesday, though some in the market voiced concern that central banks across the world lack room to respond to any economic downturn.

“I'd be worried that there isn't enough in the tool box,” said Neil Wilson, chief market analyst at Markets.com. “The Fed is in a better state than most, but I'm not sure what Europe and Japan can do.”

The Bank of Japan kept policy steady on Thursday, but introduced new forward guidance — a pledge central banks make on future policy — that commits more strongly to perpetuating ultra-low interest rates.

The yen rose 0.4% to ¥108.35/$, its highest in more than a week, holding onto gains after the BOJ's move and boosted further after the Bloomberg report.

In commodity markets, oil prices rose as investors banked on further economic stimulus by China after weak PMI data.

Brent crude futures were last up 0.6%, or 39c, at $60.99 a barrel.

Reuters