Stocks firm, dollar sags as market bet big on larger Fed cut

By Amanda Cooper

LONDON (Reuters) -Global stocks edged up for a sixth day on Monday, in a week that is almost certain to see the start of an easing cycle in the United States that investors believe may begin with an outsized move.

Central banks in Japan and the UK also meet this week, with both expected to stand pat for now, while a packed data schedule includes U.S. retail sales and industrial production.

Geopolitics loomed large with Republican presidential candidate Donald Trump the subject of a second assassination attempt on Sunday, according to the FBI.

But the key focus on Monday was the growing expectation for the Federal Reserve to cut rates by half a point after its meeting this week, as it seeks to keep the economy on course for a soft landing, in light of slowing jobs growth and moderating inflation.

The MSCI All-World index headed for a sixth straight rise, up 0.1%. The index has rallied 10% in the last six weeks as enthusiasm about a chunky Fed rate cut has boosted stocks.

"Whether or not the Fed cuts rates by 25 bps or 50 bps the market reaction will depend on two things: how they communicate the cut and their reasons for cutting by 50 bps, and also the Dot Plot and what it tells us about Fed members' current expectations for the terminal rate," XTB research director Kathleen Brooks said.

"If the Fed does start by cutting 50 bps, but at the same time reiterates that it is doing so to preserve the economy’s soft landing, this is stock-market positive. If it sounds like the Fed has to panic cut interest rates because of some grey cloud on the horizon, then expect stocks to sell off," she said.

S&P 500 futures and Nasdaq futures dipped 0.1%, suggesting a flat start for the benchmark indices after the S&P 500 last week secured its strongest weekly performance this year.

In Europe, the STOXX 600 held steady, having pared earlier losses, as investors booked some profit on last week's 1% rally.

Economic data from China over the weekend showed industrial output growth slowed to a five-month low in August, while retail sales and new home prices weakened further.

Economists at Goldman Sachs and Citigroup cut their forecasts for Chinese growth to 4.7% in 2024.

A slew of public holidays across Asia kept equity market activity subdued.

YEN ON A ROLL

As for the Fed, futures show traders are placing a 59% chance of a half-point cut, up from 30% a week ago.

The odds have narrowed sharply after media reports revived the prospect of a more aggressive easing.

Treasuries have rallied sharply, bringing the yield on the rate-sensitive two-year note down 35 bps since the start of September alone. On Monday, it was trading down 1.5 bps on the day at 3.561%, about its lowest for two years.

The Bank of England is expected to leave rates on hold at 5.00% when it meets on Thursday, though markets have priced in a 31% chance of another cut.

The Bank of Japan meets on Friday and is widely expected to hold steady, though it may lay the groundwork for a further tightening in October.

Lower Treasury yields gave the Japanese yen another boost against the dollar, which fell 0.5% on the day to 140.11, skimming a 14-month low.

The euro rose 0.4% to $1.112, with the prospect of more rate cuts from the European Central Bank keeping a lid on the currency at $1.1200.

Lower bond yields underpinned gold, which rose 0.2% to $2,582 an ounce and near an all-time peak of $2,588.81.



Oil prices rose as nearly a fifth of crude oil production in the Gulf of Mexico remained offline. [O/R]

Brent rose 0.4% to $71.91 a barrel, while U.S. crude rose 0.5% to $69.02.

Source: Investing.com