Stock rally pauses as rate cut cheer meets recession fears

By Naomi Rovnick and Wayne Cole

LONDON/SYDNEY (Reuters) – World stocks were pinned close to record highs on Monday as investors turned their attention to China and Switzerland as the next destinations for monetary easing after last week’s jumbo rate cut by the U.S. Federal Reserve.

Markets were awaiting U.S. inflation data later this week, which traders expect to confirm forecasts for more easing there. Meanwhile, China’s central bank lowered its 14-day repo rate by 10 basis points, days after disappointing markets by not cutting longer-term rates.

MSCI’S broad index of world stocks held steady after two weeks of gains.

Europe’s Stoxx share index traded flat and Wall Street stock futures wobbled between small gains and losses

The Fed cut rates by a half point last week, from a 23-year high, and money markets are pricing a 50% probability it will deliver another outsized move in November..

More than 20 billion shares changed hands on U.S. exchanges on Friday, the busiest session since January 2021, after the S&P 500 reached all-time highs.

However, investors are divided over whether global monetary easing may have started too late to stop a slowdown, or even a U.S. recession, from taking hold.

Christoph Schon, multi-asset strategist at Simcorp, noted that the last two times the Fed started monetary easing with 50 basis point cuts were in 2008 and 2001, which were years of severe downturns.

“Every time we hear this time is different and maybe this time it is, but there is now growing concern,” he said.

Markets would also be unsettled, he added, if unexpectedly strong growth or inflation data reduced expectations for future rate cuts.

Soft U.S. labour market data and brisk retail sales have generated confusion over the true state of the world’s largest economy.

In Europe, purchasing manager surveys on Monday showed France’s services sector contracted sharply in September and German business activity decreased by its sharpest pace in seven months.

Brent Crude oil, steady at $73.31 a barrel on Monday, is almost 14% below its late-June level despite escalatingMiddle East tensions.

Gold, at $2621 an ounce on Monday, is also trading just below an all-time peak, reflecting its popularity as a haven in times of uncertainty and with hedge funds holding their largest bet on the yellow metal since 2020.

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The Swiss National Bank meets on Thursday and markets are fully pricing a quarter-point cut to 1.0%, with a 41% chance it will ease by 50 basis points.

Sweden’s central bank meets on Wednesday and is also expected to ease by 25 basis points, again with some chance it might go larger.

Traders are also raising their bets on another European Central Bank cut in October.

German two-year bund yields dropped roughly 10 bps on Monday to 2.156% following the PMI data. Bond yields move inversely to prices.

Whether the market mood changes could depend on what the Fed’s preferred inflation gauge, the core personal consumption expenditures (PCE), shows on Friday. Analysts expect a 0.2% month-on-month rise, taking the annual pace to 2.7%.

The coming week also includes surveys on U.S. consumer confidence and durable goods orders.

In currency markets, the euro dropped 0.5% against the dollar to $1.107.

Japan’s yen firmed 0.2% to 143.61 per dollar as volatility in this currency pair, which has climbed as traders debate how far the dovish Bank of Japan will hike rates and how deeply the Fed will cut, stayed elevated.

MSCI’s gauge of Asia-Pacific shares outside Japan bounced 2.7% higher last week and gained a further 0.2% on Monday.

Stock markets in Tokyo were closed for a holiday but futures contracts traded at 38,510 compared to a cash close of 37,723 and Singapore’s main share index rose to its highest since late 2007.

The yield on the 10-year U.S. Treasury was 2 bps higher at 3.7432%.