|20 June, 2019

Thursday outlook: Global stocks rally, yields falls as Fed signals future rate cut

Fed sees case building for interest rate cuts this year

Federal Reserve Chairman Jerome Powell holds a news conference following a two-day Federal Open Market Committee meeting in Washington, U.S., June 19, 2019.

Federal Reserve Chairman Jerome Powell holds a news conference following a two-day Federal Open Market Committee meeting in Washington, U.S., June 19, 2019.

REUTERS/Kevin Lamarque
  • Stock markets rally, treasury yields decline
  • Oil prices rise as U.S. crude stocks are reduced
  • Pound makes gains ahead of BoE meeting
  • Gold trades higher on weaker dollar

Global Markets

Asian stock markets in Asia edged close to 2019 highs on Thursday morning as investors responded positively to the United States Federal Reserve's indication on Wednesday that interest rate cuts were likely later this year.

The Federal Reserve placed interest rates on hold on Wednesday but the minutes from its Open Market Committee (FOMC) indidcated that rate cuts of up to 0.5 percent could be made during the second half of the year as economic uncertainty has increased during a long-running trade dispute between the United States and China.

MSCI's broadest index of Asian market shares was up by 0.72 percent by 07.07 GST, while Japan's Nikkei index was trading 0.61 percent higher, according to Eikon data.

Higher Asian stocks followed a positive response from markets in the United States, where the S&P 500 index closed 0.3 percent higher on Wednesday at 2,926 - close to the last record high hit at the end of April this year.

The Fed's indication that it was willing to cut interest rates as soon as next month was seen as "no surprise" by Mike Grant, chief global strategist at B Riley FBR Inc.

In comments published by Reuters, Grant said: "I did not expect the Fed to cut today but they made a significant move indicating, strongly, that at least one rate cut was coming this year, if not more.
"I think they heeded time to react to the ECB’s (European Central Bank's) new position that rates will be cut in Europe along with a re-start of bond buying or Quantitative Easing. The Fed has not lowered rates since 2008 and I think they are adjusting to the policies of the other central banks."

The indication in FOMC minutes that interest rate cuts are on the cards also sent bond yields lower, with 10-year U.S. government yields dropping to 1.986 percent, its lowest level since late 2016. Other commentators indicated, however, that the future direction of interst rate policy could change if headway is made in trade negotiations between the U.S. and China at the forthcoming G20 meeting.

According to Reuters, Andrew Wilson, CEO of Goldman Sachs Asset Management and global head of fixed income for the bank, said: “While we expect ‘insurance’ rate cuts this year, we think the timing and magnitude of any policy easing is uncertain and somewhat dependent on U.S.-China trade relations."

Oil prices

One-month futures for Brent crude were trading 1.26 percent higher at $62.60 per barrel at 7.30 GST on Thursday morning, and WTI futures were 1.28 percent higher at $54.45 per barrel as crude stocks in the United States. Members of the Organization of Petroleum Exporting Countries also finally settled on a July date for their next meeting, followed by a meeting with allied countries on the following day at which talks will take place over whether to extend the existing regime of production cuts.

Middle East markets

The Saudi market closed 0.71 percent lower on Wednesday, with most bank shares falling. Consumer Price Index data for May showed year-on-year inflation fell for the fifth consecutive month, but the fact that month-on-month figures showed a slight increase indicated some momentum in the non-oil economy. Cement companies were also among the main gainers, with Eastern Province Cement increasing by 4.35 percent to 30 Saudi riyals ($8), and Southern Province Cement closing 3.48 percent higher at 50.6 riyals per share.

Most other Gulf markets finished higher on Wednesday. Abu Dhabi's Securities Index closed 1.27 percent higher, driven by rising bank stocks. National Bank of Fujairah gained 10.2 percent to close at 4.75 United Arab Emirates dirhams ($1.29 per share). First Abu Dhabi bank, Abu Dhabi Commercial Bank and Abu Dhabi Islamic Bank also made gains.

The Dubai Financial Market closed 0.41 percent higher, the Qatar market closed up 0.84 percent, the Muscat Securities Market was up 0.72 percent and the Bahrain Bourse was up 0.16 percent. Kuwait's Premier market largely traded sideways.

Currencies

The U.S. dollar slid following the Fed's signalling of potential future rate cuts this year.

The dollar index against a basket of six major currencies fell by 0.5 percent overnight, accourding to Reuters. The euro was up o.2 percent to $1.1248 while the British pound appreciated sharply against the dollar. The Bank of England's Monetary Policy Committee is due to announce its rate policy decision later today

Precious metals

Gold prices, which are typically negatively correlated to the U.S. dollar, rallied strongly on expectations of future rate cuts and were trading near five-year highs on Thursday morning. Spot gold was up 1.46 percent at $1,379.78 at 0808 GST and one-month gold futures prices were also trading higher at $1,380.60.

(Writing by Michael Fahy; Editing by Mily Chakrabarty)

(michael.fahy@refinitiv.com)


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