Stocks Rise on Earnings and Interest Rate Speculation
Global stocks rallied as strong earnings and optimism over a Federal Reserve interest rate cut rekindled risk appetite.
Europe's Stoxx 600 rallied as LVMH surged 13% on an unexpected return to growth, fueling a surge in luxury stocks. Asian benchmarks posted their biggest intraday gains in two months after Fed Chair Jerome Powell's remarks on the labor market reinforced bets for an October interest rate cut. S&P 500 futures rose 0.4%.
The offshore yuan strengthened as China stepped up its currency defenses amid the ongoing trade dispute. The move lifted other Asian currencies and weighed on the dollar, with a stable yuan aiding Beijing's efforts to internationalize the currency. Gold hit a new high. Since the tariff-fueled selloff in April, global stocks have rebounded sharply on expectations of further monetary easing following the Fed's September rate cut and optimism over artificial intelligence. However, the rally faces new headwinds as tensions between the US and China resurface, with both sides ramping up rhetoric and hinting at possible new restrictions on key technologies.
“Macro uncertainty remains a major drag on risk assets,” said Dilin Wu, a strategist at Pepperstone Group, in a note. “With bets of a rate cut and solid earnings supporting sentiment, I believe the downside in US stocks remains limited.”
Powell signaled on Tuesday that the US central bank is on track to deliver another quarter-point interest rate cut later this month, even as the government shutdown significantly dampened its readings on the economy. Swap contracts are pricing in about a 1.25 percentage point rate cut by the end of next year, from the current range of 4%-4.25%. Read More: Powell Says Fed May Halt Balance Sheet Shrinkage in Coming Months
China’s central bank set the so-called yuan fixing at 7.0995 per dollar, stronger than the closely watched 7.1 per dollar level. This is the first time since November that the central bank has set the yuan's peg stronger than 7.10 per dollar, having held it at that level since late August.
"A peg below 7.10 sends a strong message of strength," said Fiona Lim, a senior foreign exchange analyst at Malayan Banking Bhd. in Singapore. "A strong yuan is a symbol of how China is in a strong position for any negotiations or retaliatory escalation."
Meanwhile, US Trade Representative Jamieson Greer predicted that escalating tensions with China over export controls would ease, following talks between representatives of both countries. Trump also sounded cautiously optimistic that a positive outcome could be achieved. "We have a good relationship with China, and I think it will be fine. And if it doesn't, that's fine too," Trump told reporters on Tuesday at the White House. "We've faced a lot of pressure, and we've been very successful."
In France, Prime Minister Sebastien Lecornu won crucial support from the Socialist Party in the French National Assembly, significantly boosting his new government's chances of surviving two no-confidence motions on Thursday.
In Japan, the country's first government bond sale since the ruling coalition collapsed drew stronger demand than the 12-month average as higher yields attracted investors.
Amid political uncertainty, leaders of Japan's main opposition parties are expected to discuss on Wednesday whether they can close policy gaps and choose their own candidate for the country's prime ministerial post.
Source: Bloomberg
