Stock markets buoyed by US rate cut hopes

PARIS: European and Asian stock markets rose on Thursday on growing optimism that the US Federal Reserve will cut interest rates next month.

Stock markets in Tokyo and Hong Kong closed higher while London, Paris and Frankfurt were up in early afternoon deals after Wall Street finished in the green on Wednesday.

The dollar has been under pressure from expectations of lower rates, though it pared down some losses against the euro on Thursday.

Investor confidence in a rate cut grew after minutes from the Fed’s July policy meeting, released on Wednesday, showed that most members believe that it would be “appropriate” to lower borrowing costs in September.

Traders were also buoyed by official figures showing that US employers added around 68,000 fewer jobs monthly in the year to March than initially estimated.

European stocks bounce as traders await Fed speech

A softer US labour market, along with cooling inflation, gives the central bank room to start reducing rates that were brought to a 23-year high in order to bring down soaring consumer prices.

The markets are now eagerly anticipating a speech by Fed chief Jerome Powell at an annual gathering of global central bankers in Jackson Hole, Wyoming, on Friday for more signs that a cut is imminent.

The only doubt is how far the Fed will go, with many analysts banking on a cut of 25 basis points in September and a total of 100 basis points by the end of the year.

This year’s Wyoming get-together “will be more closely watched than usual because of the current context at a potential turning point in monetary policy”, said Mahmoud Alkudsi, senior market analyst at financial services firm ADSS.

“If Powell is upbeat about the economy, this would reinforce the increasingly prevailing view that the US is likely to avoid a recession, which has triggered the recent recovery in equity markets,” he said.

“However, this would also suggest that smaller rate cuts totaling 75 basis points, rather than 100 basis points, might be delivered over the course of this year, which could support the short-term value of the dollar.”

European markets were also supported by a key survey showing that eurozone business activity hit a three-month high in August, boosted by the Paris Olympics. A separate survey showed business activity also accelerated in Britain.

Ipek Ozkardeskaya, senior analyst at Swissquote Bank, noted that stock markets and the dollar had sunk earlier this month following a weak US jobs report.

This time, however, “no one seemed to care that a bad jobs market was a sign of recession that could hurt company profits”, she said.

While stock markets tend to rise on expectations of lower borrowing costs, the US greenback usually falls as rate cuts reduce the return on investments in dollar-denominated assets.

Ozkardeskaya said that while markets have a priced in at total of 100 basis points of rate reductions, the move would require a “jumbo” cut at one of its meetings, which “wouldn’t arrive unless there is a deeper economic and financial trouble”.

She said: “The market pricing of the moment is unsustainable for either the US dollar – which has gone too low with the expectation of a 100bp cut – or the stock markets – which have gone too high with the same expectation disregarding the fact that economic trouble is never good for profitability.”

Key figures around 1110 GMT

London – FTSE 100: UP 0.2 percent at 8,297.16 points

Paris – CAC 40: UP 0.2 percent at 7,541.01

Frankfurt – DAX: UP 0.3 percent at 18,501.15

Tokyo – Nikkei 225: UP 0.7 percent at 38,211.01 (close)

Hong Kong – Hang Seng Index: UP 1.4 percent at 17,641.00 (close)

Shanghai – Composite: DOWN 0.3 percent at 2,848.77 (close)

Dollar/yen: UP at 145.82 yen from 145.22 yen on Wednesday

Euro/dollar: DOWN at $1.1140 from $1.1151

Pound/dollar: UP at $1.3117 from $1.3087

Euro/pound: DOWN at 84.93 pence from 85.18 pence

West Texas Intermediate: UP 0.5 percent at $72.28 per barrel