World stocks lull near two-week highs

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SHANGHAI/ LONDON/ NEW YORK
World stocks held near two-week highs on Wednesday as investors bet on a worldwide wave of central bank stimulus, with expectations building that the United States and the euro zone may deliver interest rate cuts as early as July. Markets have been fired up by European Central Bank President Mario Draghi’s Tuesday volte-face on policy easing. In one of the biggest policy reversals of his eight-year tenure, Draghi flagged more policy easing if inflation failed to pick up. However, German and US bond yields which hit record lows and two-year lows respectively after the speech, inched higher to trade just off those levels . European shares too slipped off six-week highs, and Wall Street futures indicated a slightly weaker open. Some of the trepidation is down to the US Federal Reserve’s ongoing meeting, with a decision due at 1800 GMT. It is widely expected to follow the lead of the European Central Bank and open the door to future rate cuts. It should be really clear to absolutely everyone that this is a monetary policy turning point… Those rate cut expectations have now shifted much closer, said Ulrich Leuchtmann, head of currency and emerging markets research at Commerzbank. Of course the other question is: What is the Fed doing? If the Fed takes the fundamental risk of political pressure seriously, they cannot do anything today, he said, noting that President Donald Trump’s strident calls for lower interest rates posed a dilemma for the Fed. But market sentiment has been buoyed also by news that Trump will meet China’s Xi Jinping at the G20 summit this month, even though many doubt the two men can reach a breakthrough on ending their trade dispute. MSCI’s global equity index rose 0.4%, adding to Tuesday’s 1% gain, as Asian shares excluding Japan followed the lead of their European and US counterparts to jump almost 2% – their biggest one-day rally since January. Tokyo and Shanghai too climbed almost 2% while Australia’s main bourse hit an 11-year high. All eyes are now on the Fed, with Chairman Jerome Powell holding a news conference after the announcement. Futures are almost fully priced for a quarter-point easing in July and imply more than 60 basis points of cuts by Christmas. As for Europe, markets have almost fully priced a cut in September, though some analysts, such as those at Germany’s Commerzbank, now say rates will be cut in July, rather than in the last quarter of the year as they had predicted earlier. ECB sources told Reuters Draghi had flagged his measures so strongly that other board members would be unable to disagree with him at their July 25 meeting. — VoM

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