Global markets: Stocks rally, bond yields dive as Fed fuels easing hopes

TOKYO (Reuters): Asian stock markets rallied on Thursday while the dollar dropped and global bond yields plunged, with the 10-year US yield falling below 2%, after the Federal Reserve signalled possible interest rate cuts later this year.

MSCI’s broadest index of Asia-Pacific shares outside Japan rose 0.92%, led by gains in China, while Tokyo’s Nikkei advanced 0.67%.

European stock futures point to gains of up to 0.5% for markets there.

The MSCI ACWI, which incorporates readings of 49 equity markets across the world, gained 0.33% on Thursday. It has recovered a large part of its 6.7% losses made after US President Donald Trump threatened new tariffs on all of China’s imports last month.

Signs that China and the United States are returning to the negotiating table after a six-week hiatus also bolstered risk sentiment.

The rally in stocks comes as a host of central banks in Asia and Europe are scheduled to hold policy meetings later in the day, with most expected to flag moves toward looser monetary settings.

The Bank of Japan kept monetary policy steady on Thursday, preferring to save its dwindling ammunition, but speculation is rising it may further loosen its ultra-easy stance later this year.

“As the Fed’s policy is turning, central banks in many other countries will face pressure, including those from markets, to ease their policy,” said Hiroshi Yokotani, portfolio strategist at State Street Global Advisors.

On Wall Street, the S&P 500 gained 0.30% to 2,926, just 19 points off its record closing high hit on April 30. Its futures rose another 0.42% in Asia on Thursday. The US Federal Reserve on Wednesday signalled interest rate cuts beginning as early as July, saying it is ready to battle growing global and domestic economic risks as it took stock of rising trade tensions and growing concerns about weak inflation.

The bulk of Fed policymakers slashed their rate outlook for the rest of the year by roughly half a percentage point, and Fed Chairman Jerome Powell said others agree the case for lower rates is building.

Many investors viewed the overall tone as more dovish than their expectations, sending the 10-year US Treasuries yield to as low as 1.974%, its lowest level since November 2016. It was as high as 2.8% in January.

Japanese 10-year bond yields slipped 2.0 basis points to a three-year low of minus 0.160%, while the Australian yield hit a record low below 1.30%.

US money market derivatives, such as Fed funds futures and overnight indexed swaps, are fully pricing in a rate cut of 25 basis points at the next policy review on July 30-31, with about one-third chance of a bigger 50 basis point cut.

A total of 75 basis points of easing is priced in by the end of year.

However, such aggressive rate cuts when the stock prices are so close to record peaks would be rare, if not unprecedented, suggesting market expectations of easings may have gone too far.

“It seems the Fed is getting ahead of risk and doing whatever it takes to avoid downside implications due to a potential slowdown,” said Robin Anderson, senior global economist at Principal Global Investors in Des Moines, Iowa in the United States. “However, in the event inflation picks backs up, I’m apprehensive the Fed could be behind the curve if rates do in fact get cut too soon.”

Many investors think rate cut expectations could be rolled back if Washington and Beijing make some headway in their talks.

“While we expect ‘insurance’ rate cuts this year, we think the timing and magnitude of any policy easing is uncertain and somewhat dependent on US-China trade relations,” said Andrew Wilson, CEO of Goldman Sachs Asset Management for EMEA and global Head of fixed income.

US Trade Representative Robert Lighthizer said he will confer with his Chinese counterpart Vice Premier Liu He before next week’s meeting between President Donald Trump and Chinese President Xi Jinping in Osaka.

The Chinese yuan has recovered over the past couple of days on hopes of US-China talks next week on the sideline of the Group of 20 summit.

The offshore yuan rose 0.3% to at 6.8722 to the dollar, hitting a five-week high of 6.8677 at one point.

The euro rose 0.3% to $1.1265 after the Fed’s dovish signals undermined the dollar’s yield attraction.

The dollar fell 0.5% on the yen to hit a five-month low of 107.55 yen extending losses after the Bank of Japan stood pat on policy.

The British pound rebounded 0.35% to $1.2688 from Tuesday’s 5-1/2-month low of $1.2507 as investors trimmed their short bets before the Bank of England’s policy meeting on Thursday where it may strike a more hawkish tone than those of its peers.

Gold jumped above its long-held resistance around $1,350 per ounce to its highest level since September 2013, rising to as high as $1,392.3. It last stood at $1,381.00, up 1.56%.