Stocks steady, bonds in euphoric mood on bets of peak rates

Traders work on the floor at the New York Stock Exchange (NYSE) in New York City, U.S., Nov 17, 2023. REUTERS/Brendan McDermid

NEW YORK/LONDON  -World stocks steadied near two-month peaks on Friday and Treasury yields briefly touched two-month lows as investors held fast to the belief that U.S. interest rates have peaked and might even fall next year.

But a reality check came when Federal Reserve Bank of Boston President Susan Collins said on Friday that while evidence is growing that inflation is easing, she was not yet ready to rule out more rate hikes should they be needed.

That put a damper on Wall Street. The Dow Jones Industrial Average and the Nasdaq Composite finished flat, and the S&P 500 was up just 0.13 percent.

Despite sluggishness on Wall Street, MSCI’s gauge of stocks across the globe added 0.34 percent, helped in part by European shares that rallied 1 percent.

In line with U.S. rate expectations, the dollar index fell 0.48 percent, and was on track for one of its steepest weekly declines this year.  A falling dollar helped the yen to strengthen sharply to trade below 150 per dollar.

Oil prices rebounded from a four-month low, with U.S. crude and Brent jumping 4 percent on the day.

A softer tone to U.S. economic data this week has fueled rate-cuts bets, pushing Treasury yields down and lifting equity markets.

November so far has seen one of the strongest performances for stock markets this year, with MSCI’s world stock index and the S&P 500 index both up more than 7 percent.

“We’re still in this environment where we are late cycle and flirting with the idea of whether we go into a recession or not,” said Justin Onuekwusi, chief investment officer at investment firm St. James’s Place.

“This is the key reason why central bank expectations have become a key driver to risk and right now it’s hard to look beyond near-term.”

Bonds bulls out

Global bond markets were in a bullish mood.

The steep decline in U.S. Treasury yields since the start of November continued on Friday with the benchmark 10-year note yield briefly falling to a two-month low.

Later, the yield on the benchmark 10-year note was little changed at 4.439 percent, from 4.445 percent late on Thursday, and the two-year note was last up 6.1 basis points to yield 4.9025 percent, from 4.842 percent.

The gap widened between yields on two- and 10-year Treasury notes, an indicator of expectations the economy is slowing. The curve inversion was around -46.0 basis points on Friday, compared with -38 basis points the day before, and remains near its deepest point since early October.

Rate-sensitive two-year bond yields in Germany and Britain fell to their lowest levels since June with money markets now pricing in roughly 100 basis points worth of rate cuts in the United States and the euro area.

In Asia, shares outside Japan eased 0.45 percent, while Japan’s Nikkei closed up 0.48 percent, firming about 3 percent for the week, helped by the Bank of Japan’s reassurance that it was sticking with its super loose policy.

Chinese blue chips fell 0.12 percent, having missed on the general rally so far this week.

Sentiment in Asia had been supported by the apparent easing of U.S.-China tensions, with the Chinese press lauding the meeting between President Xi Jinping and President Joe Biden.

Gold was unchanged at $1,980.17 an ounce.