US shares surge as rate cut talk pierces gloom

US shares surge as rate cut talk pierces gloom
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US stocks rose yesterday , led by a rebound in the technology sector, as Federal Reserve chair Jerome Powell said the central bank would act as appropriate”to trade war risks, leaving the door open for a possible rate cut.

A day after St Louis Fed chief James Bullard said a rate cut may be warranted soon, Powell said the Fed was “closely monitoring the implications” of a trade dispute that has disrupted global markets and posed risks to growth. Wall Street’s main indices have shed more than 6% in May on fears of a recession as trade tensions between the US and China show little signs of easing.

“Investors are taking comfort in what appears to be a Fed that is contemplating on cutting rates if the economy materially slows down,” said Michael Geraghty, equity strategist at Cornerstone Capital in New York City.

Big banks such as Citigroup and Bank of America surged as Wells Fargo analyst Mike Mayo said the industry would be set to “party like it’s 1995” if rates are lowered. Also helping sentiment was a Washington Post report that Republican lawmakers may vote to block new tariffs on Mexican goods threatened by president Donald Trump.

The technology sector rose as shares of high-profile companies — Amazon, Apple, and Google — bounced back from the selloff, which was triggered by fears of heightened scrutiny from competition regulators.

The tech-heavy Nasdaq rose, having lost 10.3% since its record closing high on May 3. The S&P 500 is 6% away from its all-time high hit on May 1. Interest-rate sensitive financial stocks gained over 2%, eyeing their biggest one-day rise in two months, as US Treasury yields extended gains.

Treasuries tumbled, pushing yields up from multi-year lows, as Powell stopped short of signalling any kind of imminent move. Carmakers and chip manufacturers rallied as Mexico’s president hopes to reach a deal with the US before next week’s deadline, with his foreign minister seeing 80% odds to negotiate a solution. The Mexican peso jumped.

Mike Loewengart, vice president of investment strategy at Etrade Financial, said:

Given the ongoing uncertainty on both the interest rate and trade front, any clarity will likely be welcomed by the market

Continued strength in US consumer and business confidence outweighs the recession signal being sent by an inverted yield curve, making a rate cut unlikely this year, according to Bank of America chief executive Brian Moynihan.

He also said the ongoing trade war isn’t having enough of an impact to warrant recession concerns. Elsewhere, gains in banks, insurers, and carmakers pushed European stocks higher for a second day and the price of oil rebounded.

Meanwhile, flows of capital have already moved over to continental Europe as a result of Brexit, said the head of pan-European stock market operator Euronext, which acquired the Irish Stock Exchange in 2018.

“A significant part of the flows to the continent have already migrated on the continent, even though staff haven’t massively moved already,” said Euronext boss Stephane Boujnah.

He said as far as capital flows were concerned, Brexit had already happened and was irreversible. “Market operators cannot afford to have the same decision- making volatility as politicians,” said Boujnah in Paris.

Reuters and Bloomberg

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