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A look at the day ahead in European and global markets

By Wayne Cole, Chief Correspondent

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It’s been a day for relief rallies in Asia as investors became increasingly confident the next move in U.S. interest rates will be down, not up. All the major Asian equity markets are higher, as are U.S. and European stock futures.

While Federal Reserve Chair Jerome Powell maintained the option of another hike, he sounded less than committed to the idea. Risks were now “more two sided” and almost “balanced”, he said in his presser. They were making progress on inflation and, crucially, expectations of inflation “were in a good place”.

Federal Reserve Board Chair Jerome Powell answers a question at a press conference following a closed two-day meeting of the Federal Open Market Committee on interest rate policy at the Federal Reserve in Washington, U.S., November 1, 2023. REUTERS/Kevin Lamarque

That was enough for markets to lower the risk of a December rate hike to 22%, and a January move to 28%. Meanwhile, the probability of a rate cut by June next year advanced to almost 70% and futures now imply around 85 basis points of easing for all of 2024.

Powell, of course, played down the chance of cuts but he must know that with inflation steadily cooling real rates are rising. If the Fed does nothing at all, policy will effectively tighten into next year even as the economy is expected to slow, thus adding to the risks of recession.

The Treasury market has played its part by pushing yields up in recent weeks, and duly celebrated by pulling them down again, at least for now. Ten-year yields are off 22 basis points from Wednesday’s high of 4.71%, though that remains far above the 4.0% levels held in early August.

The 30-year yields dropped back under 5% helped by relief Treasury’s refunding plans included less issuance at the longer end than many had feared.

The dovish mood proved infectious as investors pared back rate risks across much of the developed world. The Dec 2024 EURIBOR future jumped to a five-month high and now implies almost 100 basis points of easing in 2024.

The Bank of England is seen as odds-on to hold rates when it meets later on Thursday, with a near 70% chance its tightening cycle is done and dusted.

For currencies, the drop in Treasury yields pulled the U.S. dollar down modestly, while the improvement in risk sentiment gave a lift to the battered Aussie and kiwi dollars.

The next major hurdle for equities will be results from the $2.7 trillion behemoth Apple after the bell. The focus will be on iPhone 15 sales and whether a strong start was slowed by cooling demand in China. Guidance for the crucial December quarter holiday season could also help.

Markets will now be hoping the payrolls report on Friday doesn’t rain on the party.

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