Stocks move up on Fed hope, sterling and gilts buffeted by budget surprises

Growing US rate cut bets lifted stocks for a fourth straight day on Wednesday, while Europe’s markets saw an extraordinary few hours as Britain’s fiscal watchdog inadvertently published crucial new forecasts ahead of a bruising UK budget.

When the full UK budget details did come from finance minister Rachel Reeves they contained another round of tax hikes but the early release of the Office for Budget Responsibility’s Economic and Fiscal Outlook had already caused a reaction.

Sterling and gilt yields had both rallied as the OBR’s figures painted a better-than-expected picture on the UK’s fiscal headroom, and then yo-yoed as Reeves delivered her speech.

“The problem is this budget has backloaded most of the fiscal tightening and for what matters has near term fiscal loosening. Hence the mixed market reaction,” Mizuho strategist Evelyne Gomez-Liechti said.

Before the time Reeves wrapped up UK stocks were up 0.4% while broader European equities were up 0.6%. MSCI’s world stocks index gained 0.4% with Wall Street poised for a higher restart later too.

Traders’ focus on the UK budget reflected the high-wire act for its under-pressure government and finance minister Reeves.

Little more than a year after ordering 40 billion pounds ($52.7 billion) of tax hikes - the biggest since the 1990s and which she promised would be a one-off - economists estimate Reeves is now piling on another 20-30 billion pounds of increases to try and plug the fiscal dam.

It all nudged sterling up to $1.32, while 10-year gilt yields - the main proxy of UK borrowing costs ticked up to 4.46% having dropped to 4.48% the previous day - their lowest in almost two weeks. The day’s other main moves saw the yen, which has been on a downward spiral in recent weeks, reverse an initial bounce against the US dollar triggered when sources told Reuters the Bank of Japan was preparing for a possible rate hike as soon as next month.

That would shift the central bank to more hawkish ground and comes after a meeting last week between new Prime Minister Sanae Takaichi and BOJ Governor Kazuo Ueda.

Takaichi’s high approval ratings are also prompting Japanese opposition parties to ramp up preparations for snap elections, the Yomiuri newspaper reported on Wednesday.

The kiwi dollar surged as much 1.2%, meanwhile, after the Reserve Bank of New Zealand cut interest rates 25 basis points to 2.25%, but removed its dovish guidance, signalling an end to the central bank’s easing cycle.

Its antipodean neighbour, the Aussie dollar, jumped 0.5% too after a hotter-than-expected inflation report reinforced bets that rate cuts are over for the time being there as well.

Oil prices also remained choppy. Brent remained near a five-week low after Ukrainian President Volodymyr Zelenskiy had signalled on Tuesday he was ready to advance a US-backed peace plan.

That could pave the way for a relaxation of sanctions on Russian oil firms. Brent was at $62.50 in London trading. US President Donald Trump also said on Tuesday a deal was near, but investors know there remains a long way to go.

Wall Street futures were pointing to a fourth day of gains amid the broader rise in market sentiment after Tuesday’s lacklustre US retail sales and consumer confidence data had firmed up Fed rate cut expectations and offset some ongoing tech and AI jitters.

Traders are now heading into a busy holiday shopping period starting with the Thanksgiving break on Thursday, followed by Black Friday and Cyber Monday - a crucial period for retailers.

Before all that though, investors get weekly jobless claims later and a delayed September durable goods report, scheduled for 8:30 a.m. ET. The Fed’s snapshot of economic conditions, the Beige Book, is then due at 2 p.m. ET.

Fed funds futures now price an implied 80.7% probability of a 25-basis-point cut at the Fed’s December 10 meeting, compared to even odds a week ago, according to the CME Group’s FedWatch tool.

The yield on benchmark 10-year Treasury notes hovered at 4.019%, little changed from its US close of 4.002%, after it briefly broke below the 4% threshold for the first time this month.

Asia’s overnight share gains had been led by another 2% surge from the Nikkei, although Japanese government bond short-term yields rose to the highest since the global financial crisis in 2008 as their selloff resumed.

Hong Kong and China’s equities had lagged the broader stocks rally, though, after underwhelming Q4 guidance from AI front-runner Alibaba left its shares down over 1%.

Spot gold was up 0.8% at $4,163.58 per ounce, while bitcoin, which has plummeted 30% in recent months, remained just below $87,000.

(Additional reporting by Gregor Stuart Hunter in Singapore and Joice Alves in London; Editing by Conor Humphries and Nick Zieminski)

Oil prices were steady on Wednesday after sliding to a one-month low in the previous session as investors assessed prospects of oversupply and talks over a Russia-Ukraine peace deal.

Agencies