Market rally stutters as traders eye rate cut outlook

HONG KONG - Equity traders struggled to get a recent rally back on course yesterday following a tepid lead from Wall Street, but record performance in Europe highlighted optimism that central banks were on course to cut interest rates.

London chalked up another all-time high ahead of a Bank of England meeting many hope will see officials flag their intention to begin normalising monetary policy in the summer.

This comes after Sweden’s central bank reduced borrowing costs for the first time in eight years, and said more were in the pipeline. The Riksbank decision was announced nearly two months after the Swiss National Bank became the first major Western central bank to move since a global tightening campaign to fight inflation fuelled by Covid-19 recovery and the Ukraine war.

Traders hoping for Federal Reserve cuts have been on a rollercoaster ride this year as a string of forecast-beating inflation readings have forced them to chip away at their expectations. The consensus is now about two cuts by January, against six estimated at the start of 2024.

And a number of Fed decision-makers have also looked to temper expectations, with the latest being Boston Fed president Susan Collins, who said rates would likely need to stay at their two-decade highs for longer to bring prices under control. Her comments were not dissimilar to those made by her Minneapolis counterpart Neel Kashkari the day before.

Still, a healthy run of corporate results, soothing comments from Fed boss Jerome Powell over the prospect of a rate hike and a sharp miss on US jobs last month have put a skip in traders’ step in the past week. And analysts are still broadly positive for the outlook on equities.

“Despite the lack of good news on inflation, there is a silver lining for patient investors,” said Mark Hackett of Nationwide. “As the Federal Reserve extends the timeline for interest rate cuts, historical data shows that longer Fed pauses often correlate with better equity returns. This should give investors reasons to be optimistic.”

After London’s record, and gains in Paris and Frankfurt were followed by a mixed performance in New York, Asia struggled.

Hong Kong resumed its upward momentum, having fallen for two days after a 10-day winning streak, while Shanghai was also in positive territory.

The gains came after data showed Chinese exports beat forecasts slightly while imports surged far more than expected, providing some hope that the world’s number two economy may have bottomed after a long-running slowdown since the lifting of zero-Covid measures.

“We think domestic demand will still be the key driver for growth this year,” said analysts at HSBC. “Ongoing resilience in consumption and policy easing such as for upgrading and for property demand should help put growth on track towards the ‘around five percent’ target this year.”

Bangkok was also up, but there were losses in Tokyo, Sydney, Singapore, Seoul, Wellington, Manila, Mumbai and Taipei.

London opened higher, while Paris and Frankfurt were slightly lower.

Oil prices ticked up for a second day, as investors kept tabs on efforts for a ceasefire in the Middle East, even as Israel presses ahead with an assault on Rafah in southern Gaza.