World stocks sail to highest in over a year on rate cut hopes

World stocks rallied to their highest levels since late 2022 on Wednesday, with year-end optimism high on hopes that major central banks such as the US Federal Reserve will start cutting interest rates early next year.

US stocks edged higher, with the S&P 500 inching closer to its all-time high on prospects of early interest rate cuts by the Federal Reserve.

At 9:49 a.m. ET, the Dow Jones Industrial Average was up 27.61 points, or 0.07 per cent, at 37,572.94, the S&P 500 was up 3.27 points, or 0.07 per cent, at 4,778.02, and the Nasdaq Composite was up 20.33 points, or 0.13 per cent, at 15,094.90.

Closing above the 4,796.56 level would confirm the S&P 500 has been in a bull market since touching the bear market nadir, the closing low reached in October 2022.

Volumes are, however, likely to remain low, with most participants away on year-end holidays and few catalysts, with only a weekly jobless claims data expected on Thursday.

“Traditionally, between Christmas and New Year’s, there isn’t much activity, but I do notice that a dominant emotion of optimism seems to be pervasive this week,” said Peter Andersen, founder of Andersen Capital Management in Boston.

“I do think the Fed will not raise rates in 2024 and that the economy will continue to show a successful so-called soft landing. That should provide a solid foundation for a continued rally in 2024.”

Traders’ bets that the Fed will deliver a rate cut in March currently stand at 84 per cent, up from about 21 per cent at the end of November, according to the CME Group’s FedWatch tool.

European shares firmed although trade was generally subdued given public holidays across the region on Monday and Tuesday.

China’s November industrial profits posted double-digit gains as overall manufacturing improved, data showed, but soft demand continued to constrain business growth expectations, emboldening calls for more macro policy support.

MSCI’s world stock index touched a more than one-year high and is up 4.5 per cent in December, while MSCI’s broadest index of Asia-Pacific shares outside Japan rose more than 1 per cent to an over four-month high.

“We still have strong equity markets and that is likely to hold through to New Year,” said SEB chief economist Jens Magnusson.

A risk-on mood in world markets lifted the euro to more than four-month peaks against the dollar, while oil prices slipped as some major shippers returned to the Red Sea -- an area disrupted after Yemen’s Houthi militant group began targeting vessels earlier this month.

Maersk shares fell almost 5 per cent, and other shipping stocks also slipped, giving back part of this month’s gains fuelled by expectations that a Red Sea traffic halt could boost rates.

Japan’s Nikkei rallied more than 1 per cent, and Hong Kong’s Hang Seng Index rose 1.7 per cent in its first trading day after the Christmas and Boxing Day holidays. Chinese blue chips eked out a marginal gain of 0.35 per cent.

Market pricing now shows a more than 80 per cent chance the Fed is likely to begin cutting rates next March, according to the CME FedWatch tool, with over 150 basis points of easing priced in for all of 2024.

Tim Murray, a capital markets strategist in the multi-asset division at T. Rowe Price, noted much of the year had been spent in fear that rate hikes would drag the economy into recession.

“Happily, that did not happen, and a more dovish Fed means the likelihood of recession in 2024 has fallen considerably,” he said.

US and European government bond yields edged lower as investors held tight to rate-cut bets, with 10-year US Treasury yields last down 1.5 basis points at 3.86 per cent.

Euro shines

In currency markets, the dollar remained on the back foot and languished near a five-month low against a basket of currencies.

The euro touched its highest level since August, at $1.1059 , while the dollar was 0.15 per cent firmer against the yen at 142.59 following the release of minutes from a Bank of Japan policy meeting earlier this month.

BOJ policymakers remain divided over if, and when, the central bank should move away from its ultra-loose monetary stance, the minutes show.

Bank of Japan Governor Kazuo Ueda meanwhile said he was in no rush to unwind ultra-loose monetary policy as the risk of inflation running well above 2 per cent and accelerating was small, public broadcaster NHK reported.

Brent crude futures slipped 0.5 per cent to $80.66 a barrel, while US WTI crude futures fell 0.7 per cent to around $75, pulling back from respective one-month highs hit the previous session.

Oil prices rose more than 2 per cent on Tuesday as fresh attacks on ships in the Red Sea prompted fears of shipping disruptions. Still, major shipping firms such as Maersk and France’s CMA CGM said they were resuming passage through the Red Sea following the deployment of a multinational task force to the region.

SEB’s Magnusson said his main scenario was that disturbances to shipping would be short-lived although there were risks to disruptions further out.

“It is something to keep an eye on from an inflation perspective as we know now what disturbances in global transportation can do to inflation,” he added.

“It’s not my main scenario but there is a tail risk of escalation and that’s something that could impact risk appetite.”

Iran denied on Monday a US claim that a drone launched from Iran had struck a chemical tanker in the Indian ocean.

Elsewhere, the Turkish lira weakened to a fresh record low of 29.4 against the dollar, and is now 36 per cent weaker this year.

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