Shares and euro rise before ECB rate meeting.
Shares and euro rise before ECB rate meeting.
Global Markets Surge as Investors Anticipate Central Bank Moves
London, July 27 – World shares reached a 15-month high while the euro climbed as investors shifted their focus from the anticipated interest rate hike by the U.S. Federal Reserve to the similar move expected by the European Central Bank (ECB) soon[^1^]. This change in attention indicates that investors are sensing a potential cresting of the most aggressive rise in world borrowing costs seen in the past 40 years[^1^]. The MSCI’s 47-country ACWI stocks index has surged by 30% since November and is currently at its highest level since April of the previous year[^1^].
Investors eagerly await the ECB’s decision, which is expected to raise interest rates by another quarter point as it nears the end of its tightening cycle[^1^]. Additionally, there is speculation that the Bank of Japan may also begin to shift their rates[^1^]. These upcoming central bank moves have resulted in significant gains across Europe, with the STOXX 600 up by 1%, and Italian and Spanish stocks reaching their highest levels in 12 and 8 years respectively[^1^]. Nasdaq futures have also advanced, driven by positive financial results from Meta Platforms[^1^].
In Asia, MSCI’s index of Asia-Pacific shares outside Japan has reached its highest level in five months, with Hong Kong’s Hang Seng index rallying. Chinese property stocks surged, driven by hopes of increased support from the government to a struggling sector[^1^]. Japan’s Nikkei also advanced to a three-week high[^1^]. These positive movements in global markets indicate an increasing risk appetite and a positive re-pricing of recession risks[^1^].
Jens Eisenschmidt, Chief European Economist at Morgan Stanley, highlighted that the ECB’s main focus will be on their future course of action after considering two months’ worth of inflation data, and it is unlikely that the ECB will deviate far from market expectations[^1^]. The U.S. Federal Reserve’s recent quarter-point rate hike, as widely expected, further supports the belief that the Fed’s tightening cycle has reached its peak[^1^]. The Chair Jerome Powell stated that the Fed no longer expects a recession[^1^]. The markets view this as an indication of increasing global risk appetite and optimism for an economic recovery starting later this year[^1^].
Looking forward, futures imply only a slim chance of a quarter-point increase by the U.S. central bank in September, and rate cuts of 125 basis points are expected by the end of next year[^1^].
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ECB Rate Decision and Market Expectations
The European Central Bank is widely anticipated to raise interest rates by a quarter-point at its rate decision meeting, signaling that the end may be in sight for the tightening cycle[^2^]. However, the slow retreat in euro zone inflation may put pressure on policymakers to continue or prolong the increase in rates[^2^]. Several market analysts expect a 25 basis point hike, but the market is pricing in a peak rate of 3.96%. Therefore, the possibility of another hike is seen as closer to a 50/50 chance[^2^].
Another significant event this week is the Bank of Japan meeting on Friday, where there is speculation of further tweaks to the country’s ultra-loose monetary policy known as yield curve control[^2^]. Most analysts do not expect any changes yet, although some, such as JPMorgan, anticipate widening the key 10-year band to +/- 100 basis points[^2^].
In the currency market, the yen has climbed against the dollar and reached a high of 139.35 per dollar, with overnight dollar/yen implied volatility reaching its highest level since March[^2^]. The U.S. dollar continued to experience pressure, while the risk-sensitive Australian and New Zealand dollars showed gains[^2^].
In the debt markets, yields for euro zone government bonds, which serve as proxies for borrowing costs, have begun to edge downwards ahead of the ECB’s decision and accompanying news conference[^2^]. Treasury yields have remained steady, with the 10-year U.S. note holding at 3.86% and the two-year note showing minimal fluctuation[^2^].
The price of oil is on the rise, with Brent crude futures up 0.6% at $83.41 per barrel and U.S. West Texas Intermediate crude futures up 0.85% at $79.46[^2^]. Gold prices have also seen a slight increase, now standing at $1,976.18 per ounce[^2^].
In summary, global markets are currently experiencing a surge as investors shift their focus to central bank decisions. The anticipation of rate hikes by the European Central Bank and potential shifts from the Bank of Japan has resulted in a positive trend across stock indices, including gains in Europe, Asia, and the Nasdaq[^1^]. The markets are re-pricing the potential risks of recession, and investors are cautiously optimistic about an economic recovery later in the year[^1^].
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