Global markets firm as US Fed props up rate cut expectations

Global stocks rose on Friday after a top Federal Reserve official cemented expectations of a US interest rate cut later this month, fuelling appetite for riskier assets and keeping a cap on the dollar.

In early European trade, pan-region Euro Stoxx 50 futures were up 0.63%, German DAX futures rose 0.63% and Britain’s FTSE futures gained 0.46%.

In oil markets, crude surged after the United States said its navy destroyed a drone in the Strait of Hormuz, a major chokepoint for global crude flows, raising concerns about supply disruptions out of the region.

MSCI’s broadest index of Asia-Pacific shares outside Japan was up 1%, bouncing back from the previous day’s losses, while Japan’s Nikkei advanced 2%.

New York Fed President John Williams said on Thursday that policymakers could not wait for economic disaster to hit before adding stimulus, in a speech read as a strong argument in favour of quick monetary action.

The comments by Williams made it a virtual certainty the Fed would cut interest rates by 25 basis points (bps) at its July 30-31 policy meeting and also revived expectations of an even deeper 50 bps reduction.

Financial markets quickly reacted, with Fed fund rate futures at one point pricing in almost 70 per cent chance of a 50 bp cut at the month-end meeting. The odds eased to around 40 per cent after the New York Fed clarified that Williams’ speech was not about immediate policy direction.

“In July we expect central banks to ease across the globe, led by the Fed and the ECB,” economists at Morgan Stanley wrote.

After rate cuts by South Africa and Ukraine this week, Russia and Turkey are expected to join the easing in the central and eastern European sphere, they added.

South Korea and Indonesia also lowered rates this week, with countries such as Britain expected to eventually follow.

Wall Street shares shook off a sluggish start and moved higher overnight thanks to Williams’ dovish comments.

Elsewhere in Asia, the Shanghai Composite Index rose 0.8%, Australian stocks added 0.75% and South Korea’s KOSPI gained 1.4%.

For the week, the MSCI ex-Japan index climbed a modest 1%, as riskier assets were partly capped by US President Donald Trump’s reiteration of his threat to impose further duties on Chinese imports.

Japanese STOCKS rebounded on Friday morning trade, tracking Wall Street moves and clawing back some of the previous session’s decline, with the semiconductor sector leading the gains.

The benchmark Nikkei share average rose 1.7% to 21,398.83 in midmorning trade but the index was on track to post a 1.3% loss for the week, its biggest weekly drop since late May.

Wall Street shares moved higher overnight as comments from New York Federal Reserve President John Williams helped cement expectations for an interest rate cut this month.

Taking their cues from Taiwanese chipmaker TSMC’s positive revenue outlook, Japan’s chip sector drove gains with Advantest, Disco and Tokyo Electron surging between 4.6% and 6.5% each.

The world’s largest contract chipmaker and supplier to Apple on Thursday posted a decline in second-quarter profit but said demand is likely to recover over the rest of the year, particularly from smartphone makers.

Bucking the firmer trend, Japan Post Holdings shed 0.4% to an all-time low after the Nikkei business daily reported the country’s largest private insurance firm Nippon Life requested Japan Post to halt selling its policies at its affiliate post offices.

The formerly state-owned Japan Post and its affiliate companies have faced scrutiny in recent weeks over their sales of insurance policies and toshin fund products. The two sides resumed talks recently to seek an end to a year-long trade war that has rattled financial markets and slowed global growth. But most analysts don’t expect an agreement any time soon, with some predicting a strong risk of further tariff escalation.

“Dovish Fed policy expectations do provide support for the equity markets, which are set to rebound after suffering losses the previous day,” said Masahiro Ichikawa, senior strategist at Sumitomo Mitsui DS Asset Management. “But factors such as U.S.-China trade issues and tensions over Iran are likely to limit the markets’ gains.” The dollar index against a basket of six major currencies stood little changed at 96.841 after losing roughly 0.5% overnight to a two-week low of 96.671 in the wake of comments from the Fed’s Williams.

The greenback was up 0.3% at 107.620 yen, crawling away from a three-week trough of 107.210 on Thursday after the New York Fed’s clarification of Williams’ comments. The currency had previously lost 0.6% against its Japanese peer.

The euro was 0.15% lower at $1.1258 after climbing 0.45% the previous day.

US Treasury yields were lower across the board in light of Williams’ dovish views. The 2-year yield was at 1.7894% after touching a two-week low of 1.7520%. The 10-year yield declined to a 10-day trough of 2.023% and was last at 2.0465%.

Agencies