Global equities climbed in the wake of the Federal Reserve’s second 0.75 percentage point interest rate rise in two months, as hopes that the pace of monetary policy tightening could soon slow buoyed investor sentiment.
The jump in the federal funds rate to a range of 2.25 to 2.5 per cent was widely expected but stocks gained following comments from Fed chair Jay Powell that the US central bank was open to the possibility of smaller rate rises.
“At some point, it will be appropriate to slow down . . . We might do another unusually large increase [in September] but that’s not a decision that we’ve made at all, we’re going to be guided by the data,” Powell said.
Global equities have tumbled this year as central banks have moved to tackle surging inflation with sharp rate rises, which economists have warned could weigh on growth and lead to a recession. The MSCI All-World index of global stocks has dropped more than 17 per cent year to date as central banks in Europe and Asia have joined the Fed in raising rates.
But Powell’s comments on Wednesday provided a shot in the arm to sentiment on Wall Street, where the benchmark S&P 500 index rallied to end the day 2.6 per cent higher and the tech-focused Nasdaq Composite notched a rise of 4.1 per cent, marking its largest daily gain in more than two years.
Traders and strategists said Powell’s suggestion that monetary policy decisions would be data-dependent indicated a lower probability of large rate rises going forward.
“This does imply less dramatic increases in the next three [Fed] meetings than in the last two,” said Tai Hui, market strategist at JPMorgan Asset Management, adding that recent readings on “inflation and labour market dynamics . . . currently signal the need for a more cautious approach into next year”.
Positive earnings reports from large tech groups also helped bolster market confidence on Wednesday, with shares in Google parent Alphabet and Microsoft rising 7.7 and 6.7 per cent, respectively.
Gains in Asian equity markets were more subdued, with China’s CSI 300 index of Shanghai- and Shenzhen-listed shares up 0.5 per cent on Thursday and South Korea’s Kospi up 0.7 per cent. Japan’s benchmark Topix was flat.
But the prospect of slower rate rises by the Fed, which have driven global investors to dump many Asian currencies in favour of the dollar, helped strengthen foreign exchange rates in the region.
Japan’s yen rose as much as 1.1 per cent against the greenback to about ¥135 while China’s renminbi edged up 0.2 per cent to Rmb6.746 per dollar.
Futures markets pointed to a slight rise for European equities later in the day, with the Euro Stoxx 50 set to rise 0.6 per cent and the FTSE 100 tipped to gain 0.2 per cent. The S&P 500 was expected to shed 0.3 per cent.