Global stock markets are set to mark a sixth consecutive session of gains on Monday, driven by a recent bond rally. This optimism is based on expectations of earlier interest rate cuts in the United States and Europe, with these speculations set to be tested by numerous central bank speakers scheduled to address the markets throughout the week.
A recent uptick in bond markets follows a favorable U.S. payrolls report and encouraging productivity data, which has indicated that the labor market might be cooling off enough to obviate the necessity for further rate hikes by the Federal Reserve.
Futures markets have shifted, indicating a 90% likelihood that the Fed has finished raising interest rates, and an 86% probability that the first policy easing may occur as early as June.
Market expectations also suggest an approximately 80% chance that the European Central Bank will reduce rates by April, while the Bank of England is seen as likely to ease monetary policy in August.
The benchmark 10-year U.S. Treasury yields witnessed a drop of around 29 basis points last week, marking the most significant weekly decline since March. It’s essential to note that bond yields move inversely to their prices.
While the rally has taken a pause on Monday, the 10-year yield remains significantly lower, standing at around 4.587%, in contrast to the high above 5% recorded in mid-October.
Samy Chaar, chief economist at Lombard Odier, has cautioned that while an inflation outlook may support rate cuts next year, there’s a need for prudence. Going too far with more and sooner cuts might be excessive, as market dynamics tend to fluctuate over time.
Central bankers will also have an opportunity to share their perspectives on this dovish outlook, with at least nine Federal Reserve members scheduled to speak during the week, including Fed Chair Jerome Powell. Additionally, representatives from the Bank of England and the European Central Bank will also provide their insights.
Australia’s central bank stands as an outlier in this scenario, with expectations that it is likely to resume raising rates at its policy meeting on Tuesday due to stubbornly high inflation.
The Bank of Japan is also on the path toward tightening, albeit at a gradual pace. The head of the Japanese central bank mentioned on Monday that they were closer to achieving their inflation target, although it wasn’t sufficient to end their ultra-loose monetary policy.
The hope for reduced borrowing costs continues to bolster global stocks, particularly in Asia, which missed the rally inspired by favorable U.S. jobs data on Friday.
MSCI’s broadest index of Asia-Pacific shares outside Japan saw a 2.0% gain on Monday, contributing to the 0.38% increase in MSCI’s global index, marking its sixth consecutive session of gains.
Last week, the global index experienced its most substantial weekly gain in a year. European shares opened positively on Monday and remained relatively flat, following their best week since March.
South Korea particularly stood out, with a 4.3% increase, as authorities extended a ban on short-selling until mid-2024.
S&P 500 futures and Nasdaq futures both saw a 0.1% increase.
Dollar Slips
Two-year Treasury yields held steady at 4.875%, up by 4 basis points, after a 17 basis points decline the previous week. Meanwhile, the benchmark 10-year Bund yield in the eurozone rose by 5 basis points to 2.69% after seven consecutive sessions of declines.
The retreat in Treasury yields had a negative impact on the dollar, with the dollar index falling by 0.14% to 104.91, its lowest level since late September, marking a 1.3% decline for the week.
The euro saw a 0.17% increase, reaching $1.0747, following a 1% surge on Friday to its highest level in nearly two months. The dollar has even weakened in recent sessions against the yen, standing at 149.57 yen, significantly below its recent high of 151.74.
The drop in the dollar and yields contributed to the support of gold at $1,985, showing a slight decline on the day but remaining close to the recent five-month peak of $2,009.
Oil Prices Rebound
Oil prices saw a modest increase after a 6% drop the previous week, supported by the confirmation that Saudi Arabia and Russia would continue their additional voluntary oil output cuts.
In the Middle East, Israel has rejected calls for a ceasefire in Gaza, indicating that military operations against the Palestinian Islamist group Hamas are set to intensify.
Brent crude added 1.5% to reach $86.31 per barrel, while U.S. crude increased by a similar amount, reaching $81.75 per barrel.