Stocks rally to gain back recent losses

U.S. stocks rallied the most in three weeks, the dollar fell and emergingmarket assets surged after a dovish tone from the Federal Reserve chairman fueled speculation the central bank is closer than thought to pausing on rate hikes.

Stocks that had fallen the most during the six-week slump in American equities led gains after Jerome Powell said rates are “just below” the range of a neutral policy, potentially removing one of the biggest overhangs. Aside from the Treasury market, where yields turned lower but only by a few basis points, moves in other asset classes were just as heady:

⏩ The spread between December 2018 and December 2019 eurodollar futures — a measure of how much tightening traders expect next year — briefly touched less than 25 basis points, the equivalent of one Fed hike. It had been forecast two earlier this month.

⏩ The Nasdaq 100 Index jumped almost 3 percent, with the Amazon.com and Netflix each higher by at least 5 percent to lead the FANG cohort.

⏩ The Bloomberg Dollar Index sank the most in two weeks, fueling speculation its two-month rally may be over.

⏩ The pound reversed losses sparked by the Bank of England’s warning that a no-deal Brexit could spark a recession.

⏩ Emerging-market equities hit a three-week high, while the rate on Mexico’s 10-year dollar-denominated bond tumbled by 16 basis points.

⏩ The two-year Treasury yield fell two basis points to 2.81 percent.

⏩ Utilities and makers of household products lagged behind as defensive shares fell out of favor.

The Fed chairman said the economic outlook remains “solid,” bolstering expectations for a rate hike when the central bank meets next month, but he noted that the effects of higher rates take time to show up in data. All told, investors surmised the Fed is likely to reduce the number of hikes or outright stop them next year.

“He’s taking away the concern about aggressive interest rate increases, which resolves one of the issues that hung over the markets during the last couple of months,” Bob Phillips, managing principal at Spectrum Management Group, said in an interview. “We still have the trade war issue with China and we’ll see how that works out this week. If that comes out positive, we’ll have a decent rally at the end of the year.