Global Markets Surge as ECB Rate Cut Looms: Euro and Stocks Near Record Highs

European Central Bank

Global markets edge towards record highs as the European Central Bank prepares for its first interest rate cut in nearly five years. The euro gains momentum, while stocks, commodities, and bonds react to economic data and central bank decisions.

World stocks were on the verge of an all-time high and the euro gained on Thursday ahead of the European Central Bank‘s anticipated interest rate cut, the first in nearly five years. As this moment approached, traders boosted the pan-European STOXX 600 by 0.3% in early deals and observed the MSCI 47-country main world index inch closer to a new peak. Sentiment reached a near-frenzy, with Wall Street’s S&P 500 and Nasdaq setting new records on Wednesday following Nvidia’s surge past Apple to become the world’s second-most valuable company, behind Microsoft.

The euro continued its rise, adding another 0.1% to its 2% increase over the last month, reaching nearly $1.0880. Most traders, however, remained cautious, awaiting the ECB’s forthcoming signals. All 82 economists polled by Reuters expect the ECB to lower its key rate to 3.75% from the record 4.0% level it has held since September, though future actions remain widely debated.

Despite upcoming EU elections, stronger-than-expected data in recent weeks has cast doubt on the need for further cuts this year. Eurozone inflation exceeded predictions in May, driven by price growth in the services sector, which reflects domestic demand. This mirrors larger-than-expected wage increases in the first quarter, boosting consumers’ disposable income after years of below-inflation pay hikes.

Michael Metcalfe, head of global macro strategy at State Street Global Markets, noted the advance notice of the ECB’s move. “Maybe today is going to mark something of a watershed as ECB are not going to be able to be as clear with their forward guidance,” Metcalfe said. Considering the recent robust data, “what follows is now a much harder question for markets – and the ECB – to assess,” he added. “It could be a classic buy-the-rumour-sell-the-fact and the euro get some support from here.”

The Bank of Canada was the first G7 country to cut rates in this cycle on Wednesday. The U.S. Federal Reserve meets next week but isn’t expected to move until September. In contrast, the Bank of Japan, meeting the week after, will debate if and when to raise rates. Canada’s dollar recovered some losses from its post-cut dip, settling at C$1.3679 per U.S. dollar.

In bond markets, Germany’s 2-year government bond yield, sensitive to policy rate expectations, was down 0.5 bps at 2.98%, having hit 3.125% on Friday, its highest since mid-November. Benchmark 10-year U.S. Treasury yields hovered near their lowest in two months after data suggested a cooling U.S. labor market. This included private U.S. payrolls on Wednesday and a report on Tuesday showing job openings in April at their lowest in over three years.

Markets are now pricing nearly two full 25 basis point Fed cuts this year, with a September move seen as a 68% chance compared to 47.5% last week. “We’re still in the Goldilocks range so bad economic news has been good for equities as Fed rate cuts are back on the table,” said Ben Bennett, Asia-Pacific investment strategist at Legal And General Investment Management.

Investor focus will soon shift to the U.S. nonfarm payroll report for May due on Friday, with economists expecting an increase of 185,000 jobs. “We need that to be around 100-150k to maintain the Goldilocks narrative,” Bennett said. “Much higher than that and yields could move back up, but if we get zero or negative, then we could be talking about a hard landing again.”

In commodities, Brent crude futures rose 0.48% to $78.79 a barrel, while U.S. West Texas Intermediate crude futures increased 0.63% to $74.54. Spot gold rose 0.59% to $2,369 per ounce after a previous 1% rise, while silver increased 1.34% to $30.41 per ounce.

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