Stocks on Global Markets Rise After Fed’s Announcement on Interest Rate Cuts

Stocks on global markets are climbing to their highest levels in several years, while bond yields have fallen as traders increased their bets that central banks will begin aggressive rate cuts next year.

These moves followed new forecasts from the Federal Reserve indicating a reduction of 0.75 percentage points next year, reported the Financial Times.

Fed Chairman Jay Powell also stated that it is ‘likely at or near the peak for this tightening cycle’, which is the clearest signal from the U.S. central bank that its tightening campaign is over. Unsurprisingly, global markets reacted positively.

In Europe, the Stoxx 600 index rose 1.6 percent, marking its highest point since January 2022, while the German Dax reached a new all-time high, increasing by 0.9 percent.

In the bond markets, the yield on two-year Treasury bonds sensitive to interest rates fell by 0.17 percentage points to 4.31 percent, while yields on two-year German bonds (the benchmark for the eurozone) dropped by 0.18 percentage points to 2.49 percent.

– Global markets are rising in response to last night’s news from the U.S. that the Federal Reserve anticipates interest rate cuts. Ten-year government bonds have strongly recovered in response, and this significant easing of financial conditions is lifting stock markets – said Tomasz Wieladek, European economist at T Rowe Price.

‘It was a meeting without resistance’

Yields on ten-year bonds fell by 0.11 percentage points to 2.06 percent, the lowest level since January, while yields on ten-year securities dropped by 0.12 percentage points to 3.7 percent. Traders are now predicting at least six rate cuts of 0.25 percentage points for the Fed and the European Central Bank next year.

Gold rose 0.6 percent to $2,037 per troy ounce, while the dollar index, which measures the U.S. currency against a basket of six similar currencies, fell 0.2 percent to its lowest level since August.

Markets have also adjusted prices for five cuts by the Bank of England next year, compared to four cuts ahead of the Fed’s policy meeting. Investors will be closely listening for further policy guidance when the BoE and ECB meet later on Thursday. The yield on two-year notes fell by 0.18 percentage points to 4.17 percent, reported the FT.

At a press conference held on Wednesday, Powell refrained from dismissing market pricing for rate cuts next year, as many market participants had expected.

– It was a meeting without resistance, and we haven’t seen that in almost three years. I think Powell delivered what the markets wanted. Where that reaction is strongest is in long-term yields: you see how much looser financial conditions can be important for those sectors – said Florian Ielpo, head of the macroeconomics department at Lombard Odier Investment Managers.

Market expectations for interest rate cuts have significantly changed in recent weeks after inflation was lower than expected, and economic data has increased the belief that central banks have now tightened monetary policy enough to bring inflation back to their target of 2 percent.