Financial Times: Biggest stock and bond rally on Wall Street in the last 6 months


US stocks had their best day in six months as bond yields fell after the Fed and other central banks signaled that the interest rate hike cycle that has negatively affected financial markets for more than a year may be coming to an end.

Powell started the rally

Thursday’s rally in stocks and bonds, whose prices generally move inversely to bond yields, began after the Fed kept interest rates steady for the second consecutive meeting. Fed Chairman Jay Powell’s post-FOMC statements were described as “dovish” by investors.

The possibility of the Fed flying back to the pigeon coop caused the biggest two-day drop in 10-year Treasury yields, the benchmark for global financial asset prices, since the U.S. banking crisis in early March. The yield was at 4.63 percent, a 0.19 point decrease from Wednesday, at its lowest level early Thursday.

“The meeting underscores our view that the Fed is likely done tightening and markets have become too aggressive in pricing higher interest rates for longer periods of time,” said Solita Marcelli, chief investment officer for the Americas at UBS Wealth Management.

S&P500 recovers summer losses

The S&P 500 index rose 1.9 percent, showing its best daily performance since March, thanks to the strong earnings of companies such as Starbucks, and finished the day with a 9.5 percent rise.

Powell emphasized that the Fed will “be careful” regarding future interest rate hikes. Investors took this as a sign that the Fed was largely successful in slowing the US economy.

However, Powell added that he was “not yet confident” that monetary policy was restrictive enough to bring inflation back to the 2 percent target.

The Fed decided to keep the benchmark interest rate between 5.25 percent and 5.5 percent at its meeting that ended on Wednesday. On Thursday, the Bank of England also voted 6-3 to keep interest rates steady at 5.25 percent, while Norway’s central bank also left interest rates unchanged.

Central Banks of developed countries went on hold

Last week, the ECB suspended interest rate hikes. Looking at the decline in inflation and the recession affecting the continent, strategists commented that the ECB has come to the end of its monetary tightening process.

The scale of investors’ reaction to the Fed chairman’s comments revealed how glad many are to see the end of monetary tightening that has increased borrowing costs for households and businesses around the world.

Previous Fed rate hikes and a boom in U.S. government borrowing caused 10-year yields to rise above 5 percent last month for the first time in 16 years.

Investors have suffered huge losses in the past, thinking the Fed would prematurely end its rate hike cycle. At the end of October, the peak-to-trough loss of global equities amounted to $12 trillion.

Tiffany Wilding, chief executive of bond fund family kingpin Pimco, argued that Powell’s comments did not appear to be preparing the market for a possible rate hike in December and that “there has been some easing in financial conditions as a result.”

US Treasury shortened borrowing maturity

The Treasury department announced Wednesday it would slow the pace of issuance of long-term bonds, causing U.S. government bond yields to fall.

Government bonds also rallied across Europe on Thursday. Two-year UK bond yields, which reflect interest rate expectations, fell 0.09 points to 4.70 percent, their lowest level since June. The benchmark 10-year yield decreased by 0.15 points to 4.35 percent.

Ten-year German bond yields, a benchmark for the eurozone, fell 0.05 percentage points to 2.7 percent after employment data showed the country’s economy was stagnating.

Source: Stocks rally and bond yields tumble as investors trim interest rate outlook


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