© Reuters. FILE PHOTO: A passerby walks past an electric monitor displaying various countries’ stock price index outside a bank in Tokyo, Japan, March 22, 2023. REUTERS/Issei Kato/File Photo
By Marc Jones
LONDON (Reuters) – Share markets were in recovery mode on Thursday as investors stuck to bets for sizable cuts in U.S. and European interest rates even if the kick-off dates might now be a little later than first hoped.
A rare three-way split at the Bank of England had bamboozled Europe’s traders but with Wall Street pointing higher after its biggest falls since September ahead of crucial Apple (NASDAQ:), Amazon (NASDAQ:) and Meta (NASDAQ:) results it was all still to play for. [.N]
The Euro was also warming up after a morning dip in the red () while the euro was sulking near a 6-week low ahead of euro zone inflation data due shortly.
Wednesday’s Federal Reserve decision to hold U.S. rates at 5.25-5.5% was still a heavy influence too. The move itself had been no surprise, but it emphasised that rates would not be cut until it was more confident inflation was truly beaten.
In a media conference, Fed Chair Jerome Powell flatly stated a cut as early as March seemed unlikely, but also conceded that everyone on the committee was looking to ease this year.
At the Bank of England on Thursday, six of its nine rate setters had voted to keep borrowing costs at 5.25% but with two voting to hike and one voting to cut it was first three-way split since 2008 financial crash.
Market reaction was muted though, with the pound and British government bond yields rising modestly as investors slightly reined in bets on the extent of cuts over 2024.
“We continue to expect (UK) interest rate cuts later in the year, but there is unlikely to be an imminent change,” State Street (NYSE:) portfolio manager Mitul Patel said. Votes both for tightening and easing revealed an “increasing divergence” meanwhile. [GVD/EUR]
Following Fed chief Powell’s comments on Wednesday, markets had actually doubled down on a May Fed move, pricing in 32 basis points of cuts – implying a 100% probability of 25 basis points and some chance of a 50 basis-point easing.
“Our view all along was that the market got a bit ahead of itself with the idea of March (Fed) cuts,” said Beata Manthey, Head of European Equity Strategy at Citi.
“The important thing though is that we are heading for a decent number of cuts this year. We have five forecast in the U.S. which is significant, and in Europe (for the ECB) we have six.”
The Fed effect pushed the dollar higher leaving it at loftiest level of the year against other world currencies. There was a 6-week peak against the euro too which was also under pressure from Sweden’s crown after its central bank also held its rates again. [/FRX]
Wall Street was heading right back into tech earnings meanwhile and whether the red hot run of megacap stocks might be cooling after Google and Microsoft (NASDAQ:) were both punished this week over their mounting AI development costs. [.N]
Apple’s iPhone sales are expected to have seen the best growth in five quarters. But analysts see a tough year for the company in China and traders are eager to see if Amazon can cash in on its delivery heft by boosting fee revenue from its “Buy With Prime” service.
“Our market positioning model shows that the Nasdaq is meaningfully stretched to the long side,” Citi’s Manthey said. “So the selloff yesterday didn’t alarm me.”
Investors also seemed to be wagering that the more the Fed delayed now, the more aggressive it would have to cut in the future given slowing inflation would sharply lift real rates.
As a result, Fed fund futures for December have priced in a further 11 basis points of easing this year taking the total expected to 141 basis points.
Likewise, Treasuries rallied strongly as 10-year yields dived 12 basis points to 3.91% in the wake of the Fed decision. Some of those gains were then pared in Europe, nudging yields up to 3.94% versus 2.21% on German bonds and more than 20-year lows of 2.42% in China this week.
The rush into bonds had been further encouraged by renewed jitters over regional U.S. banks when New York Community Bancorp (NYSE:) crashed 37% on Wednesday to the lowest in over two decades after posting a surprise loss.
That spilled over into other bank stocks and contributed to a sharp 1.6% pullback in the , while the Nasdaq had already been pressured by falls from Google parent Alphabet (NASDAQ:) and Tesla (NASDAQ:). [.N]
added 0.3%, while Nasdaq futures firmed 0.4%. [RESF/US]
Asian markets had been choppy overnight. MSCI’s broadest index of Asia-Pacific ending down 0.4% although sentiment was helped by a stabilisation in Chinese blue chips, along with some better surveys on home prices and manufacturing.
eased 0.8% as the yen gained. South Korea bounced 1.8% following upbeat trade data and a survey showing factory activity grew for the first time in 19 months.
Gold also gyrated in the wake of the Fed, and was last up 0.2% at $2,041 an ounce. [GOL/]
Oil prices pared some of the sharp losses suffered on Wednesday, as tensions in the Middle East helped offset concerns about oversupply and soft global demand. [O/R]
futures edged back above $81 a barrel, while rose 74 cents to $76.63 per barrel.