International stock markets surged to their greatest levels in more than a year and a half on Thursday, while borrowing prices and the value of the dollar fell as signs of impending rate cuts from the world’s most powerful central bank caused exhilaration.

When Norway announced an unexpected boost and the Bank of England held to its plan to keep UK rates high, the surge was ignited on Wednesday by the seeming easy-going tone of the U.S. Federal Reserve. Meanwhile, the attentiveness of the Swiss central bank ensured that European markets remained at two-year highs.

The focus was going to shift to the European Central Bank’s rate announcement at 13:15 GMT and the press conference that followed, during which investors also quickly advanced bets on rate cuts.

With the German bund and U.S. Treasury yields at nine- and four-month lows, respectively, bond market borrowing costs were still in a tailspin. Meanwhile, MSCI’s 47-country world stocks index was adding to its phenomenal 13% rise over the prior 1-1/2 months.

It was mostly in response to the Fed’s statement on Wednesday that its record tightening of monetary policy was probably coming to an end now that inflation was declining more quickly than anticipated.

The Fed funds rates were expected to fall in a year, according to almost all of its 19 policymakers (17 of them). The median prediction was for a three-quarters percentage point decline from the current range of 5.25% to 5.50%.

This came as a shock and caused markets to speculate that rate reduction would begin as early as March and could ultimately total twice as much as the Fed’s rate-setters now anticipate.

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

“The assumption is, that if the Fed didn’t push back no one will and everyone will 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.”

But European traders were keeping an eye on more than just the central banks.

At a crucial session in Brussels, Hungarian Prime Minister Viktor Orban was adamantly stating that Ukraine did not meet the requirements to begin EU accession negotiations.

Orban is obstructing 50 billion euros ($54 billion) in financial help for Kyiv as well as the commencement of EU membership negotiations.

The meeting takes place at a critical juncture in Ukraine’s fight against Russia’s invasion, following the failure of a counteroffensive to produce significant progress and the Biden administration’s inability to pass a $60 billion aid package through Congress thus far.

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

After the BoE remained steadfast in its declaration that interest rates will stay high for a “extended period of time,” the UK’s FTSE 100 lost up some of its gains.

In addition to raising the pound by 0.7%, currency dealers dismissed recent statistics that indicated a slowing in UK wage growth and a 0.3% decline in October GDP estimates.

In accordance with estimates from economists surveyed by Reuters prior to the meeting, the Monetary Policy Committee of the Bank of England voted 6-3 to maintain rates at a 15-year high of 5.25%.

“The Bank of England isn’t riding to the rescue of a flatlining economy,” Vivek Paul, UK Chief Investment Strategist of BlackRock’s ‘Investment Institute’.

The Fed’s signals had been the main topic of conversation in Asia overnight, and they had also precipitated a strong Wall Street rally.

The largest percentage increase in one day in a month was recorded by MSCI’s broadest index of Asia-Pacific equities outside of Japan, which surged 1.8% despite China’s continued losses and Toyko’s 0.7% decline due to a higher yen.

Robert Alster, Chief Investment Officer at Close Brothers Asset Management, called the Fed’s turnabout “a definitely a good surprise for assets,” calling it “unadulterated good news and an early Christmas present for all,” even though it puts pressure on the BOE and ECB in the future. Futures on US stocks indicated that the S&P 500 would climb by a more moderate 0.2% later, while the yield on the 10-year Treasury fell to 3.9845%, breaking below the critical 4% barrier.

The U.S. dollar index, which compares the value of the dollar to a basket of other currencies, dropped 0.3% more to 102.53, meaning that it now trades at $1.09 against the euro and down almost 1% against the yen at 141.82 yen.

Spot gold increased by 0.23% to $2,030.99 an ounce, following a 2.4% increase on Wednesday. With U.S. West Texas Intermediate (WTI) up at $70.95 and Brent up $1.5, or 2%, to $75.80 a barrel, oil continued to rise.

(Adapted from Reuters.com)

Categories: Economy & Finance, Strategy