Global markets cheer Powell’s rate cut talk

London — Stock markets sprinted to the highest in more than 18 months while borrowing costs and the dollar tumbled on Thursday as traders bet Europe’s top central banks would join the Federal Reserve later in signalling interest rate cuts for next year.

Switzerland’s central bank was already out the blocks pointing to subdued global growth and it was a fast start for Europe’s Stoxx 600, which leapt 1.6% to its highest in almost two years before Bank of England (BOE) and European Central Bank (ECB) decisions later.

MSCI’s 47-country world stocks index was adding to its stellar 13% gain over the past 1½ months, while bond market borrowing costs were in a tailspin, with German bund and US treasury yields at nine- and four-month lows, respectively.

It was the reaction to the Fed on Wednesday where chair Jerome Powell said its historic tightening of monetary policy was likely to be over with inflation now falling faster than expected.

A near-unanimous 17 of its 19 policymakers had projected the federal funds rate would be lower in a year — with the median forecast showing a three-quarters of a percentage point drop from the present 5.25%-5.5% range.

That provided a surprise and left markets betting that cuts could start as soon as March and might end up being double the amount the Fed’s ratesetters expect at present.

“The big question for today is how much central banks hunt in packs,” said Michael Metcalfe, head of macro strategy at State Street global markets, referring to the coming BOE and ECB rate decisions.

“The assumption is that if the Fed didn’t push back no-one would and everyone would pivot together. Interest rate markets have moved a lot ... and given what the Fed has said, markets will see that as a vindication of those moves.”

The central banks weren’t the only things Europe’s traders were watching, though. Hungarian Prime Minister Viktor Orban was digging his heels in at a high-stakes summit in Brussels, saying Ukraine didn’t fulfil the criteria to start accession talks with the EU.

Orban is blocking the start of EU membership talks and €50bn in financial aid for Kyiv.

The summit comes at a crucial time in Ukraine’s war against Russia after a counter-offensive failed to make major gains and with the Biden administration so far unable to get a $60bn aid package through the US Congress.

“There’s no reason to negotiate membership of Ukraine now,” Orban said on his arrival at the Brussels summit. “Pre-conditions were not met. We have to come back to it later on,” he said, referring to European Parliament elections next June.

Dollar down

The focus in Asia overnight had all been on the Fed’s signals that had also prompted a sharp rally on Wall Street.

MSCI’s broadest index of Asia-Pacific shares outside Japan shot up 1.8%, its biggest one-day percentage jump in a month, though China stumbled again and a stronger yen pushed Toyko down 0.7%.

The Fed’s pivot “is a definitely a good surprise for assets”, Close Brother’s Asset Managements CIO Robert Alster said, describing it as “unadulterated good news and an early Christmas present for all”, albeit one that heaps pressure on the BOE and ECB later.

US stock futures pointed to a more modest 0.2% rise for the S&P 500 later, as the 10-year treasury yield pushed as low as 3.9845%, breaking below the psychological 4% mark.

The dollar index, which measures the currency against a basket of currencies, fell a further 0.3% to 102.53, leaving it at $1.09 to the euro and down almost 1% against the yen at ¥141.82/$.

Spot gold was up 0.23% at $2,030.99 an ounce after rising 2.4% on Wednesday.

Reuters