Posted on

US stocks cap global market rally

Rate-cutting signals from central banks spark hopes of more sustainable gains for shares

STOCKS: US stocks recorded their biggest weekly advance in three months for week finishing March 22nd as investors on both sides of the Atlantic welcomed signals that major central banks remain on course to cut interest rates. The index gained 2.3 per cent on the week after Federal Reserve chair Jay Powell on Wednesday indicated a preference to cut rates by three-quarters of a percentage point this year. The index has now climbed more than 27 per cent since a low in late October.

Despite two months of stubborn inflation data, Fed officials were “never going to come out and spook the market”, said Steven Blitz, chief US economist at TS Lombard. “Their first rule is ‘don’t create a recession’ and the best way of starting a recession is tipping equities into a bear market,” he added.

The global stock rally that followed this week’s Federal Reserve meeting, and after Bank of England governor Andrew Bailey told the Financial Times that markets were right to expect more than one reduction in UK borrowing costs this year. London’s main stock index has had a strong few weeks and after the BoE left interest rates on hold is closing in on its February 2023 peak of 8047.06.

Bailey said rate cuts were “in play” at future BoE meetings this year adding that the fight against inflation was “an increasingly positive story”. The BoE governor said things were “moving in the right direction” in tackling inflation. At this week’s Monetary Policy Committee meeting, two previously hawkish policymakers dropped their demands for a rate rise, instead voting with the majority to keep them on hold.

Traders in swaps markets are now fully pricing in three quarter-point interest rate cuts from the Band of England by the end of 2024. The implied probability of a first cut by June has risen to about 80 per cent, from 50 per cent at the start of the week. Pricing is similar for the Fed, with cuts forecast to begin in June or July.

 The Swiss National Bank became the first big central bank to start loosening monetary policy on Thursday when it unexpectedly cut its headline interest rate by 0.25 percentage points to 1.5 per cent.

 Japan’s Nikkei 225 index rose 5.6 per cent this week, even though the Bank of Japan increased borrowing costs for the first time since 2007. Traders were reassured by signals that the BoJ’s benchmark rate, which remains just above zero, will not increase sharply following Tuesday’s rise

BONDS have underperformed stocks so far this year but nonetheless welcome the downward move in inflation and the prospect of 2024 global interest rate cuts. The US 10-year government bond is trading in the middle of its range over the last 6 months at 4.22% and a similar mid-range number of the UK 10-year Government bond at 4.00%. Prices were higher and yields about 0.4% lower in both UK and US bond markets on January 1st but that represents a time when markets had got over-excited, and overly anticipated 2024 interest rate cuts.   

COMMODITIES: OIL is very static around 80$ per barrel but GOLD has enjoyed a strong bull run over the last couple of months. Gold pays no interest making other instruments such as bonds more attractive but with interest rates and bond yields likely to fall this year, gold has become more attractive and is trading just below and all-time high of $2,170 per ounce.

Inflation data remains key to all markets!!