European, US Stocks Futures Climb on Fed Cut Hopes: Markets Wrap

(Bloomberg) -- European and US equity futures advanced on Thursday after the Federal Reserve signaled it’s close to cutting rates in September. Oil climbed for a second day on Middle East tensions.

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Contracts for the Euro Stoxx 50 rose 0.3%. US stock-index futures climbed 0.6%, adding to gains on Wall Street. Investors are now watching Bank of England’s interest rate decision, the third major central bank meeting in two days. The monetary authority is expected to cut rates by 25 basis points, according to consensus forecasts compiled by Bloomberg, which would be the first reduction since the start of the pandemic.

In Asia, Japanese stocks tumbled by the most since 2020, with the yen rallying as traders braced for further rate hikes by the Bank of Japan. The diverging fortunes reflected traders’ positioning for the narrowing of US-Japan rates differentials after the two central bank decisions on Wednesday.

After raising rates, BOJ Governor Kazuo Ueda said more increases will come if its price forecasts are met. Japan’s Topix index slid almost 4% before paring, as the yen touched 148.51 against the dollar, its strongest level since March. The currency has gained almost 8% in the past month.

“The volatility of the yen has risen since the shifting Fed expectations after US CPI numbers on July 10,” said Societe Generale strategist Frank Benzimra. “The BOJ hike decision yesterday amplified the volatility. We see some carry trade starting to reverse. We are at inflection points. It doesn’t mean the end of the Japan bull market, but a pause, and importantly some shift back to domestic sectors.”

A Bloomberg index of dollar strength had its worst day since May on Wednesday, supporting a rally in emerging markets and Asian currencies. The Malaysian ringgit strengthened to levels not seen in almost a year against the dollar, while the Thai baht traded at a four-month high.

“Most of the Asian currencies are likely to gain against the US dollar in the short term,” said Tomo Kinoshita, global market strategist at Invesco Asset Management Japan. “Given the volatility caused by the prospect of prolonged higher rates in the US from the start of this year, Asian markets had suffered from currency depreciation pressures, which prevented many Asian central banks from initiating rate cut moves.”

Treasuries fell in Asian trading to partly unwind a Wednesday rally, where yields tumbled some 10 basis points or more across the curve on Fed rate cut hopes. Australia and New Zealand yields fell Thursday, tracking gains for Treasuries in the prior session. Gains for US debt also reflected reports that Iran had ordered retaliation against Israel for the killing of a Hamas leader on its soil.

The report pushed Brent crude to break through $81 a barrel mark after jumping 3.6% in the previous session. Gold steadied just below a record high.

In Europe, BMW AG earnings declined in the second quarter on waning sales in its key market China, while ArcelorMittal SA reported a fall in profit and cautioned that excessive exports from China left the steel market in an unsustainable position.

Federal Reserve

The changes in the Fed statement solidify a shift in tone among several policymakers, including Powell, recognizing growing risks to the labor market. They are also likely to reinforce expectations among economists and investors for a rate cut at the central bank’s Sept. 17-18 gathering.

“Powell’s comments last night were definitely positive for risk assets as they strongly hinted at a cut in September,” Pauline Chrystal, a fund manager at Kapstream Capital in Sydney. “With the US economy still resilient and confidence that inflation is returning to target, it pushes further out the risk of a recession.”

Interest-rate swaps showed traders are still fully priced in a quarter point cut in September — and a total of almost 70 basis points worth of reductions for the year.

“The data has moved in Powell’s direction and now he’s getting ready to follow,” said David Russell at TradeStation. “Jobs data on Friday and CPI in two weeks are the next big items. If those go well, we could get clearer messaging from Powell at Jackson Hole in late August.”

Key events this week:

Eurozone S&P Global Eurozone Manufacturing PMI, unemployment, Thursday
US initial jobless claims, ISM Manufacturing, Thursday
Amazon, Apple earnings, Thursday
Bank of England rate decision, Thursday
US employment, factory orders, Friday

Some of the main moves in markets:

Stocks

S&P 500 futures rose 0.6% as of 6:45 a.m. London time
Nikkei 225 futures (OSE) fell 2.9%
Japan’s Topix fell 3.2%
Australia’s S&P/ASX 200 rose 0.4%
Hong Kong’s Hang Seng rose 0.2%
The Shanghai Composite rose 0.1%
Euro Stoxx 50 futures rose 0.3%
Nasdaq 100 futures rose 0.9%

Currencies

The Bloomberg Dollar Spot Index was little changed
The euro was little changed at $1.0829
The Japanese yen was little changed at 149.90 per dollar
The offshore yuan fell 0.1% to 7.2344 per dollar
The Australian dollar fell 0.2% to $0.6530
The British pound was little changed at $1.2849

Cryptocurrencies

Bitcoin fell 0.5% to $64,267.13
Ether fell 1.2% to $3,181.52

Bonds

The yield on 10-year Treasuries advanced three basis points to 4.06%
Japan’s 10-year yield was little changed at 1.040%
Australia’s 10-year yield declined three basis points to 4.08%

Commodities

West Texas Intermediate crude rose 0.9% to $78.63 a barrel
Spot gold was little changed

This story was produced with the assistance of Bloomberg Automation.

--With assistance from Richard Henderson.

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