Dec 19, 2023: European stocks opened higher on Tuesday, and global shares hovered near their peak levels from April 2022 as traders wagered on potential rate cuts in the upcoming year. The yen declined following the Bank of Japan’s decision to retain its ultra-loose monetary policy.
As anticipated, the Bank of Japan maintained its ultra-low interest rates and reaffirmed its dovish policy guidance, easing concerns that it might signal a near-term shift from negative interest rates. Consequently, the yen weakened, with the dollar-yen climbing 1.2% to 144.5, and the euro-yen rising 1.3% to 158.17. The Nikkei rallied, especially led by technology shares, while Japanese government bond yields dipped.
This positive sentiment buoyed global markets, with the MSCI World Equity index rising 0.1%. In Europe, the STOXX 600 climbed 0.2%, and London’s FTSE 100 gained 0.1%.
Fiona Cincotta, a senior markets analyst at City Index, noted that the Bank of Japan’s dovish stance supported sentiment, contributing to the modest uptick in equities. Lower market liquidity, owing to traders taking leave ahead of the Christmas holiday, might also be influencing these market movements.
Traders are weighing various cues regarding the trajectory of interest rates in the U.S. and the eurozone.
European Central Bank (ECB) member Francois Villeroy de Galhau hinted at a potential rate cut in 2024, emphasizing the aim to bring inflation back down to the ECB’s 2% target by 2025 at the latest. His statement was considered more of a commitment than just a forecast.
Although ECB President Christine Lagarde recently pushed back against immediate rate cut expectations, market sentiments seemed unconvinced. Dovish ECB policymaker Yannis Stournaras echoed Villeroy de Galhau’s sentiment, indicating a need for stable inflation below 3% by mid-2024 before considering rate cuts.
Market reactions to the ECB’s stance indicated skepticism about sustained high-interest rates given the proximity of inflation to the 2% mark and the prevalent economic weaknesses.
Yields on euro zone government bonds were lower, with the German 10-year yield down by 5 basis points at 2.025%. The euro climbed 0.2% to $1.0942, while the U.S. dollar index remained flat at 102.5, following a 1.3% decline last week.
The 10-year U.S. Treasury yield was at 3.9107%. After Federal Reserve Chair Jerome Powell’s unexpectedly dovish tone at the end of the Fed meeting, Treasury yields initially fell last week, only to rise again on Monday following comments from Chicago Federal Reserve President Austan Goolsbee. Other Fed officials, including Loretta Mester from the Federal Reserve Bank of Cleveland, indicated that the market might have anticipated interest rate cuts sooner than expected.