By Marc Jones and Koh Gui Qing
NEW YORK/LONDON (Reuters) -World shares rose and the euro rose on Thursday after the European Central Bank cut interest rates for the first time in almost five years, signaling further steps could take some time.
ECB policymakers have implemented their widely reported cut by a quarter point to 3.75%. Yields on euros and German government bonds rose after the ECB’s measure, as investors took into account the central bank’s refusal to promise further interest rate cuts.
The euro rose to almost $1.0890 against the dollar, and government bond yields – which reflect borrowing costs and move inversely to rates – also rose.
The pan-European economy rose 0.7%.
MSCI’s main world index of 47 countries rose as much as 0.3%, close to the record level hit on May 20, before paring gains slightly.
Wall Street, however, was more dovish, with prices unchanged after hitting a record high earlier on Thursday. The index rose 0.2% and the index was flat, also retreating from a record high earlier in the day.
Chipmaker Nvidia (NASDAQ:) fell 1.1% after hitting an all-time high, a day after surpassing its market value of $3 trillion.
Marchel Alexandrovich, a partner at Saltmarsh Economics, said markets will now focus on whether the US Federal Reserve will cut interest rates in September.
The euro’s gains took it to $1.0887 after rising 2% last month, although most traders were sitting on their hands. ECB President Christine Lagarde emphasized at the start of her press conference after the meeting: “We are not committing ourselves to a specific interest rate path in advance.”
Stronger-than-expected data in recent weeks, plus Thursday’s rise in the ECB’s internal inflation forecasts, have raised doubts about how many more rate cuts will be justified this year.
“This was a prudent cut,” said Samuel Zief, head of global FX strategy at JP Morgan Private Bank. “Currently we think September could be next. But there is no reason to expect significant reductions in the short term as growth has actually picked up recently.”
GOLD BLOCKS STORY
The Bank of Canada surpassed the ECB to become the first G7 country to cut rates this cycle on Wednesday. The US Federal Reserve meets next week, but is not expected to take place until September at the earliest.
“This step ahead of the Fed was not at all obvious just three months ago,” said Eric Vanraes, head of the fixed income department at Eric Sturdza Investments. “We still believe the first rate cut will happen before the fourth quarter, in September.”
In contrast, the debate at the Bank of Japan, which meets the following week, will be about whether to raise interest rates, and when.
The Canadian dollar recovered some of the losses from the dip after Thursday’s cut, reaching C$1.37 per U.S. dollar.
On bond markets, the yield on two-year German government bonds, which is sensitive to policy interest rate expectations, rose to 3.037%. On Friday the rate was 3.125%, the highest level since mid-November.
Ten-year U.S. Treasury yields were flat at 4.287%, although still near two-month lows, after data this week suggested the U.S. labor market is finally cooling.
The data included private U.S. payrolls on Wednesday and a report on Tuesday that showed job openings fell to the lowest level in more than three years in April.
Markets are now pricing in nearly two quarter points of Fed cuts again this year, with a move in September seen as a 68% chance compared to 47.5% last week.
“We are 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 attention will soon turn to the May U.S. nonfarm payrolls report on Friday, with a Reuters poll of economists expecting payrolls to rise by 185,000 jobs.
“We need that amount of between 100 and 150,000 to keep the Goldilocks story alive,” Bennett said. “Much higher than that and yields could rise again, but if we go to zero or negative we could be talking about a hard landing again.”
On the commodity front, crude futures rose as much as 1.9% to $79.86 per barrel, while U.S. West Texas Intermediate crude futures rose 2% to $75.53. [O/R]
Gold rose 0.8% to $2,372.77 an ounce after rising 1% earlier, while the cryptocurrency bitcoin was at $71,415, sliding back to March’s record high. [GOL/]
