Stocks cheer ECB rate cut after US-driven bond rally

CNA

a day ago

LONDON : The latest ECB interest rate cut helped lift European stocks on Thursday, after more weak U.S. economic numbers had triggered a sharp government bond rally and left Wall Street eyeing coveted bull market territory again.
With the European Central Bank's eighth rate cut in just over a year taking euro zone borrowing costs down to 2 per cent, investors are now waiting to hear what Christine Lagarde signals might come next, given the current uncertainty over a potential U.S. trade deal.
German data out earlier had shown industrial orders unexpectedly rose in April due to strong domestic demand, whereas new ECB staff forecasts on growth and inflation had both been downgraded again.
It all combined to lift Europe's STOXX 600 index for a third day running, with a new German tax relief package and the sight of Wall Street closing in on a 'bull market' after a near 20 per cent rebound from its 'Liberation Day' panic also helping the mood.
The euro and regional government bonds barely budged however as traders digested the ECB's move, which had been widely expected after data this week showed euro zone inflation now safely back at its just below 2 per cent target.
Oxford Economics' Oliver Rakau expected Lagarde to sound even more non-committal than usual in the post rate-decision press conference starting at 1245 GMT.
Trade talks with the U.S. and robust data coming out of Germany had increased the chance that this might even be the last cut of the cycle, although for now Rakau still expects two more before the end of the year.
"A sudden trade deal could shift things along a lot," he said. "They don't want to be wrongfooted, and German fiscal stimulus is also coming."
The currency markets were largely stuck in a holding pattern with focus also on the trade developments and closely watched U.S. non-farm payrolls due on Friday.
The dollar was broadly steady after dropping in the previous session following weak U.S. jobs and services data that added to signs that the uncertainty around tariffs is starting to take a toll.
The yield on the 30-year U.S. Treasury bond fell below 4.9 per cent in what Deutsche Bank estimated was the biggest daily drop since February, while the benchmark 10-year yield dropped to 4.385 per cent, having been at a 3-month high of 4.629 per cent just a couple of weeks ago.
TRADE TALKS
Trump's doubling of tariffs on steel and aluminum imports had also become effective on Wednesday, hitting Canada and Mexico in particular. The same day, his administration sought "best offers" from trading partners to stop other import levies taking effect in July.
Japan was sending key trade negotiator Ryosei Akazawa to the U.S. on Thursday for another round of talks. Germany's chancellor Friedrich Merz was also in Washington to meet Trump.
MSCI's broadest index of Asia-Pacific shares outside Japan had jumped 0.7 per cent overnight, with South Korea's KOSPI touching an 11-month high amid optimism around new President Lee Jae-myung and Hong Kong's Hang Seng up 1 per cent.
"There is a degree of complacency in the equity markets, in the sense there is an expectation now that there will continue to be resolution and deals being done," said Chris Nicol, Australia equity strategist at Morgan Stanley.
"The black and white of the policy is still to be put in stone and the growth and inflation impacts are still relatively uncertain."
The dollar index, which measures the greenback against a basket of currencies, rose 0.1 per cent to 98.8, trimming its 0.5 per cent slide on Wednesday.
Among the individual moves, it was up 0.3 per cent against the yen at 143.34, 0.25 per cent higher against the Swiss franc at 0.82025 francs, and virtually unchanged against the euro and sterling at just over $1.14 and $1.35 respectively.
Gold pared gains from the previous day, while oil steadied after slipping on a build in U.S. inventories and as Saudi Arabia cut its July prices for Asian crude buyers. [O/R]
Spot gold edged 0.1 per cent lower to $3,374 per ounce. Brent crude ticked up 0.4 per cent to just over $65 a barrel.