World stocks sail to highest in over a year on rate cut hopes

World stocks rallied to their highest levels since late 2022 on Wednesday, with year-end optimism high on hopes that major central banks such as the US Federal Reserve will start cutting interest rates early next year.

US stock futures were mostly flat a day after the S&P 500 touched its highest intraday level since January 2022. European shares firmed although trade was generally subdued given public holidays across the region on Monday and Tuesday.

China’s November industrial profits posted double-digit gains as overall manufacturing improved, data showed, but soft demand continued to constrain business growth expectations, emboldening calls for more macro policy support.

MSCI’s world stock index touched a more than one-year high and is up 4.5% in December, while MSCI’s broadest index of Asia-Pacific shares outside Japan rose more than 1% to an over four-month high.

“We still have strong equity markets and that is likely to hold through to New Year,” said SEB chief economist Jens Magnusson.

A risk-on mood in world markets lifted the euro to more than four-month peaks against the dollar, while oil prices slipped as some major shippers returned to the Red Sea -- an area disrupted after Yemen’s Houthi militant group began targeting vessels earlier this month.

Maersk shares fell almost 5%, and other shipping stocks also slipped, giving back part of this month’s gains fuelled by expectations that a Red Sea traffic halt could boost rates.

Japan’s Nikkei rallied more than 1%, and Hong Kong’s Hang Seng Index rose 1.7% in its first trading day after the Christmas and Boxing Day holidays. Chinese blue chips eked out a marginal gain of 0.35%.

Market pricing now shows a more than 80% chance the Fed is likely to begin cutting rates next March, according to the CME FedWatch tool, with over 150 basis points of easing priced in for all of 2024.

Tim Murray, a capital markets strategist in the multi-asset division at T. Rowe Price, noted much of the year had been spent in fear that rate hikes would drag the economy into recession.

“Happily, that did not happen, and a more dovish Fed means the likelihood of recession in 2024 has fallen considerably,” he said.

US and European government bond yields edged lower as investors held tight to rate-cut bets, with 10-year U.S. Treasury yields last down 1.5 basis points at 3.86%.

In currency markets, the dollar remained on the back foot and languished near a five-month low against a basket of currencies.

The euro touched its highest level since August, at $1.1059 , while the dollar was 0.15% firmer against the yen at 142.59 following the release of minutes from a Bank of Japan policy meeting earlier this month.

BOJ policymakers remain divided over if, and when, the central bank should move away from its ultra-loose monetary stance, the minutes show.

Bank of Japan Governor Kazuo Ueda meanwhile said he was in no rush to unwind ultra-loose monetary policy as the risk of inflation running well above 2% and accelerating was small, public broadcaster NHK reported.

Brent crude futures slipped 0.5% to $80.66 a barrel, while U.S. WTI crude futures fell 0.7% to around $75, pulling back from respective one-month highs hit the previous session.

Oil prices rose more than 2% on Tuesday as fresh attacks on ships in the Red Sea prompted fears of shipping disruptions. Still, major shipping firms such as Maersk and France’s CMA CGM said they were resuming passage through the Red Sea following the deployment of a multinational task force to the region.

SEB’s Magnusson said his main scenario was that disturbances to shipping would be short-lived although there were risks to disruptions further out. “It is something to keep an eye on from an inflation perspective as we know now what disturbances in global transportation can do to inflation,” he added.

“It’s not my main scenario but there is a tail risk of escalation and that’s something that could impact risk appetite.”

Elsewhere, the Turkish lira weakened to a fresh record low of 29.4 against the dollar, and is now 36% weaker this year. Base metals prices rose in London on Wednesday, buoyed by industrial profit gains in top metals consumer China, while aluminium touched an eight-month high on technical buying and supply concerns.

As trade resumed after the Christmas break, three-month aluminium on the London Metal Exchange (LME) gained 0.8% to $2,345 a metric ton in official open-outcry trading after hitting its highest since May 2 at $2,382.

The aluminium gains were on the back of buying by Commodity Trade Advisor (CTA) investment funds, which are largely driven by computer programmes, one trader said.

Agencies