Global stock markets experienced a significant rally on Thursday, buoyed by investor optimism that the Federal Reserve’s half-point rate cut will help facilitate a soft landing for the world’s largest economy.
In Europe, the Stoxx Europe 600 index rose by 1%, with the Cac 40 in Paris gaining 1.3% and the FTSE 100 increasing by 0.8%. U.S. stock futures also indicated a rebound after declines in the previous session, with S&P 500 contracts up 1.3% and those for the tech-heavy Nasdaq 100 rising 1.7%.
Japanese equities saw gains as well, with the Topix index climbing 2%, driven primarily by technology stocks and exporters.
Prior to Wednesday’s rate cut, U.S. interest rates had reached their highest levels since 2001, as the Fed aimed to combat the most significant inflation surge in a generation. With consumer price inflation now at 2.5%, close to the Fed’s 2% target, the central bank has signaled that further reductions may follow.
JPMorgan strategists noted that comments from Fed Chair Jay Powell and revised interest rate expectations support a “Goldilocks narrative,” which they believe is favorable for both the economy and corporate earnings.
In bond markets, yields on two-year German government bonds, the eurozone’s benchmark, decreased by 0.03 percentage points to 2.24%. Meanwhile, two-year gilt yields in the UK fell by 0.02 percentage points to 3.89%.
The latest “dot plot” from Fed officials indicated that most expect rates to drop another half-point by year-end, targeting a range of 4.25% to 4.5%. However, futures markets are pricing in nearly three-quarters of a percentage point in cuts.
In currency markets, the British pound reached its highest level against the dollar since March 2022 following the Fed’s decision, although it later retreated. Investors anticipate that the Bank of England, which cut rates last month, will maintain current borrowing costs in a meeting scheduled for today.
The Japanese yen strengthened to ¥142.5 against the dollar, recovering from a low of ¥144 earlier in the day, as traders expect the Bank of Japan to keep rates steady during its policy meeting concluding on Friday.
Additionally, the Australian dollar, Indonesian rupiah, and Chinese renminbi all gained against the U.S. dollar, though the dollar index—tracking the currency against a basket of peers—remained flat.
Economists suggest that lower U.S. interest rates may benefit emerging markets by reducing the costs of dollar financing and other borrowing. Furthermore, decreased rates on U.S. bonds could make assets from other countries more appealing. “By slashing real rates and real returns on U.S. dollar bonds, emerging markets are likely to perform better in relative terms,” stated Trinh Nguyen, senior emerging Asia economist at Natixis.
Related topics: