World Stocks Reach Highest Levels Since Late 2022 on Optimism for Interest Rate Cuts
LONDON – On Wednesday, world stocks surged to their highest levels since late 2022, driven by year-end optimism and hopes that major central banks, including the U.S. Federal Reserve, will begin cutting interest rates early next year. U.S. stock futures remained flat after the S&P 500 reached its highest intraday level since January 2022. Meanwhile, European shares saw a slight increase, with trading activity subdued due to public holidays across the region earlier in the week.
China’s November industrial profits showed double-digit gains as overall manufacturing improved, although soft demand continued to limit business growth expectations. This has led to calls for more macro policy support. MSCI’s world stock index reached a more than one-year high and has risen by 4.5 percent in December. Additionally, MSCI’s broadest index of Asia-Pacific shares outside Japan rose over 1 percent to a four-month high.
SEB chief economist Jens Magnusson expressed confidence in the strong equity markets, stating that they are likely to hold through to the New Year. The euro also experienced gains against the dollar, reaching more than four-month peaks, while oil prices declined as major shippers resumed operations in the Red Sea following disruptions caused by Yemen’s Houthi group.
Maersk shares fell over 4.5 percent, along with other shipping stocks, partially reversing the gains made earlier this month due to expectations of increased rates resulting from the Red Sea traffic halt. Japan’s Nikkei and Hong Kong’s Hang Seng Index both rallied over 1 percent in their first trading day after the Christmas and Boxing Day holidays. Chinese blue chips saw a marginal gain of 0.35 percent.
Market pricing now indicates an over 80 percent chance that the Fed will begin cutting rates in March next year, with more than 150 basis points of easing priced in for 2024. Tim Murray, a capital markets strategist at T. Rowe Price, highlighted that much of the year was spent in fear of rate hikes leading to a recession. However, with a more dovish Fed, the likelihood of a recession in 2024 has significantly decreased.
In the currency markets, the dollar remained weak and hovered near a five-month low against a basket of currencies. The euro reached its highest level since August, while the dollar showed a slight increase against the yen following the release of minutes from a Bank of Japan policy meeting. The minutes revealed that BOJ policymakers remain divided on when to move away from their ultra-loose monetary stance.
Brent crude futures slipped 0.2 percent to $80.89 a barrel, and U.S. WTI crude futures fell 0.5 percent to $75.37, retreating from their one-month highs. Oil prices had risen over 2 percent on Tuesday due to concerns about shipping disruptions in the Red Sea. However, major shipping firms such as Maersk and France’s CMA CGM announced that they were resuming passage through the Red Sea after the deployment of a multinational task force to the region.
SEB’s Magnusson stated that his main scenario was that shipping disturbances would be short-lived, but there were risks of disruptions in the future. He also emphasized the potential impact on inflation and risk appetite, stating that while it is not his main scenario, there is a tail risk of escalation.
Iran denied the U.S. claim that a drone launched from Iran had struck a chemical tanker in the Indian Ocean.
By Dhara Ranasinghe and Rae Wee
