Global stocks rally on expected Fed rate cuts; euro on defensive

Friday, 5 July 2019 00:01 -     - {{hitsCtrl.values.hits}}

TOKYO (Reuters): Asian stocks advanced on Thursday, tracking solid gains on Wall Street as data pointed to slowing economic growth in the United States, bolstering the prospect of rate cuts by the Federal Reserve as soon as this month.

MSCI’s broadest index of Asia-Pacific shares outside Japan rose 0.3%, while Japan’s Nikkei and Australian benchmark were up 0.3% and 0.5%, respectively, although a US public holiday kept activity somewhat subdued.

On Wall Street, which closed at midday on Wednesday for the eve of Independence Day, all three major stock indexes finished at record closing highs as expectations of Fed policy easing grew.

A report by a payrolls processor ADP showed US companies added jobs in June, but fewer than what analysts had forecast, raising concerns the labour market is softening even as the current US economic expansion marked a record run last month.

“Stocks and bonds rallied together as the markets were betting on interest rate cuts at the European Central Bank and the US Federal Reserve,” said Noriko Miyoshi, head of fixed income at Simplex Asset Management in Tokyo.

“The pace looks too fast. Investors across the world rushed to take part in the game of yield hunting,” she said.

Global sovereign bonds rallied overnight. The 10-year Treasury note yield plunged to 1.939%, a level last seen following Donald Trump’s election as president in November 2016.

Most 10-year euro zone bond yields slid to record lows on Wednesday as investors bet the ECB’s dovish stance would continue, while the 10-year German Bund yield fell to minus 0.399%, flirting with the ECB’s minus 0.40 deposit rate.

European Union leaders’ nomination of Christine Lagarde, the head of the International Monetary Fund, to replace Mario Draghi as president of the ECB reinforced expectations of more monetary policy easing if it’s needed.

The 10-year Italian bond yield hit 1.599%, its lowest since October 2016 as the government eases its budget ambitions. The market’s next focus is on Friday’s US non-farm payrolls for June, which economists expect to have risen by 160,000 in June, compared with 75,000 in May.

Mainland Chinese shares drifted into negative territory amid US-China trade uncertainty and a Trump comment over alleged currency manipulation, with the Shanghai Composite down 0.2% and the blue-chip CSI 300 dropping 0.3%. Hong Kong’s Hang Seng edged 0.1% higher.

The US Commerce Department said on Wednesday it was reviewing license requests from US companies seeking to export products to China’s Huawei Technologies “under the highest national security scrutiny” since the company is still blacklisted.

Top representatives from the United States and China will meet in the coming week to continue trade talks between the world’s largest economies, White House economic adviser Larry Kudlow said on Wednesday.

In a Wednesday tweet, Trump repeated his call for the United States to match China and Europe’s “big currency manipulation game” and pumping money into their economies.

In the foreign exchange market, the euro traded at $1.1285, near its two-week low of $1.1268 set the previous day. The dollar was little changed at 107.76 yen, losing steam as the fall this week in US bond yields. The British pound stood at 1.2584, having hit a two-week low of $1.2557 as economic data reinforced expectations that the Bank of England would join its central bank counterparts in cutting interest rates to shore up a worsening economic outlook.

In commodities, oil prices inched lower on Thursday after solid gains the day before, pressured by data showing a smaller-than-expected decline in US crude stockpiles.

Front-month Brent crude futures, the international benchmark for oil prices, were down 0.7% at $63.40 per barrel, while US West Texas Intermediate (WTI) crude futures were down 0.6% at $56.98 per.

Gold prices were steady on Thursday after hitting a one-week high in the previous session, as gains in stock markets offset support from a weaker dollar and US rate cut hopes.