(Bloomberg) — European and U.S. stock futures advanced Thursday after the Federal Reserve signaled it was poised to cut interest rates in September. Oil rose for a second day due to tensions in the Middle East.
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Contracts for the Euro Stoxx 50 rose by 0.3%. U.S. stock index futures rose 0.6%, adding to gains on Wall Street. Investors are now watching the Bank of England’s interest rate decision, the central bank’s third major meeting in two days. The monetary authority is expected to cut rates by 25 basis points, according to Bloomberg consensus forecasts, which would be the first cut since the pandemic began.
In Asia, Japanese shares fell the most since 2020, with the yen recovering as traders brace for further rate hikes from the Bank of Japan. The divergent fortunes reflected traders’ positioning for narrowing interest rate differentials between the U.S. and Japan after Wednesday’s two central bank decisions.
After raising rates, BOJ Governor Kazuo Ueda said more hikes will come if price forecasts are met. Japan’s Topix index fell almost 4% before parrying, while the yen reached 148.51 against the dollar, its strongest level since March. The currency has risen almost 8% in the past month.
“Yen volatility has risen since the Fed’s shifting expectations following the US CPI data on July 10,” said Societe Generale strategist Frank Benzimra. “The BOJ’s decision to raise rates yesterday added to volatility. We are seeing some carry trades starting to reverse. We are at turning points. It does not mean the end of the Japanese bull market, but a pause and, most importantly, a shift back to domestic sectors.”
A strong dollar Bloomberg index had its worst day since May on Wednesday, supporting a rally in emerging markets and Asian currencies. The Malaysian ringgit appreciated against the dollar to levels not seen in almost a year, while the Thai baht traded at a four-month high.
“Most Asian currencies are likely to appreciate against the US dollar in the near term,” said Tomo Kinoshita, global market strategist at Invesco Asset Management Japan. “Given the volatility caused by the prospect of prolonged higher interest rates in the US from the start of this year, Asian markets suffered from currency devaluation pressures, which prevented many Asian central banks from initiating interest rate cuts.”
Government bonds fell in Asian trading to partially halt Wednesday’s rally, where yields fell about 10 basis points or more across the curve on hopes of a Fed rate cut. Yields on Australia and New Zealand fell on Thursday, following gains for government bonds in the previous session. The 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 helped Brent crude break through $81 a barrel after rising 3.6% in the previous session. Gold remained just below a record high.
In Europe, BMW AG’s profits fell in the second quarter due to declining sales in key market China, while ArcelorMittal SA reported a profit drop and warned that excessive exports from China left the steel market in an unsustainable position.
Federal Reserve
The changes in the Fed’s statement reinforce a shift in tone among several policymakers, including Powell, who recognize growing risks to the labor market. They are also likely to reinforce expectations among economists and investors about a rate cut at the central bank’s September 17-18 meeting.
“Powell’s comments last night were definitely positive for risk assets as they strongly pointed to a cut in September,” said Pauline Chrystal, fund manager at Kapstream Capital in Sydney. “With the US economy still resilient and confidence that inflation will return to target levels, the risk of a recession is further reduced.”
Interest rate swaps showed traders are still fully priced in a quarter-point cut in September – and nearly 70 basis points of cuts in total for the year.
“The data has gone Powell’s way and now he’s preparing to follow suit,” said TradeStation’s David Russell. “Jobs data on Friday and CPI in two weeks are the next big items. If that goes well, we could get clearer messages from Powell in Jackson Hole by the end of August.”
Main events this week:
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Eurozone S&P Global Eurozone Manufacturing PMI, unemployment, Thursday
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U.S. Initial Unemployment Claims, ISM Manufacturing, Thursday
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Amazon, Apple earnings, Thursday
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Bank of England interest rate decision, Thursday
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US employment, factory orders, Friday
Some of the major moves in the markets:
Shares
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S&P 500 futures rose 0.6% as of 6:45 a.m. London time
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Nikkei 225 futures (OSE) fell 2.9%
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Japan’s Topix fell 3.2%
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Australia’s S&P/ASX 200 rose 0.4%
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Hong Kong’s Hang Seng rose 0.2%
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The Shanghai Composite rose 0.1%
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Euro Stoxx 50 futures rose 0.3%
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Nasdaq 100 futures rose 0.9%
Currencies
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The Bloomberg Dollar Spot Index was little changed
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The euro was little changed at $1.0829
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The Japanese yen was little changed at 149.90 per dollar
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The offshore yuan fell 0.1% to 7.2344 per dollar
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The Australian dollar fell 0.2% to $0.6530
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The British pound was little changed at $1.2849
Cryptocurrencies
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Bitcoin fell 0.5% to $64,267.13
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Ether fell 1.2% to $3,181.52
Bonds
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The yield on ten-year government bonds rose by three basis points to 4.06%
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Japan’s 10-year yield was little changed at 1.040%
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The Australian ten-year yield fell by three basis points to 4.08%
Raw materials
This story was produced with the help of Bloomberg Automation.
–With assistance from Richard Henderson.
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