Global stock markets paused their gains on Wednesday, stabilizing after a long rally that took them to recent record highs. Investors are awaiting confirmation that the US Federal Reserve will decide to cut interest rates, in line with their expectations.
The minutes of the Fed's July 30-31 meeting show that officials are leaning toward lowering rates at the upcoming September meeting. Fed Chairman Jerome Powell is expected to reiterate the central bank's commitment to easing policy at its annual conference in Jackson Hole, Wyoming, on Friday. The move comes after the bank successfully quelled the worst surge in inflation in 40 years.
Oil prices fell while gold held its high, hovering near the record highs it hit on Tuesday, as the dollar weakened amid expectations of interest rate cuts.
On Wall Street, the indices showed modest gains, with the Dow Jones Industrial Average (.DJI) up 0.13% to 40,889, the S&P 500 (.SPX) up 0.42% to 5,620, and the Nasdaq Composite (.IXIC) up 0.57% to 17,918.
The MSCI All Country (.MIWD00000PUS) also showed positive dynamics, adding 0.4% and almost reaching its July record. Since the beginning of the year, it has gained an impressive 13.9%.
The STOXX (.STOXX) index of 600 leading companies in Europe rose 0.3%, moving closer to its all-time high set on June 7.
World stocks have been volatile this month, as investors worried about U.S. employment data, which has heightened fears of a possible recession in the world's largest economy.
However, the pessimism has since given way to hopes for a soft landing, which investors see as an opportunity thanks to the expected cut in U.S. interest rates, which could begin as early as September.
The U.S. Labor Department reported on Wednesday that job creation was significantly lower than initially expected for the period through March. The news has heightened the Federal Reserve's concerns about the health of the labor market, which in turn affects monetary policy going forward.
"The labor report confirms the futures market's assessment that the Fed is likely to cut rates at its September 18 meeting," Quincy Crosby, chief global strategist at LPL Financial, said in an email.
Futures markets have already priced in the likelihood of a 25 basis point rate cut next month, as well as a one-in-three chance of a 50 basis point cut. A 100 basis point cut is expected this year, with another 100 basis points expected next year.
U.S. Treasury yields also fell. The benchmark 10-year note shed 2.3 basis points to 3.795%, down from 3.818% late last night. The yield on two-year bonds, which is more sensitive to interest rate expectations, fell by 6.9 basis points, reaching 3.9305% from 4% late Tuesday.
Thus, global markets continue to wait. Investors are focused on the upcoming Fed meeting in September, where the further course of monetary policy will be decided. Any new data on the state of the US economy could significantly affect this course, and therefore, global financial markets.
Global markets find themselves in a unique situation where the prospect of a significant rate cut is not accompanied by recession risks. This is in stark contrast to five of the last seven rate-cutting cycles, when lower borrowing costs were accompanied by an economic slowdown, according to Ross Yarrow, managing director of U.S. equities at investment bank Baird.
"If we can get to a point where the Fed cuts rates, inflation comes down, and employment stays high, that would be a very positive outcome," Yarrow said. He added that such an environment could create a positive outlook for equity markets to continue to rally.
Asian markets were less optimistic. The MSCI Asia-Pacific Ex-Japan Index (.MIAPJ0000PUS) fell 0.3%. In Hong Kong, the Hang Seng Index (.HSI) fell 0.7%, with JD.com (9618.HK) contributing significantly to the decline, falling 8.7% after Walmart (WMT.N) decided to sell its large stake in the company.
Japan's Nikkei (.N225) also fell 0.3%, pausing its recovery at 38,000, which had become resistance after the August collapse.
The weaker dollar helped gold, which neared record highs, while strengthening the yen, which has returned to 145.135 per dollar from a multi-year low hit last month.
The euro also strengthened, gaining about 3% in August to reach $1.115, its highest since December last year.
Gold prices continued to hover around $2,510 per ounce, remaining close to the record highs reached on Tuesday. At the same time, oil prices went down again: US crude oil fell by 1.69% to $71.93 per barrel, while Brent fell by 1.49% to $76.05 per barrel.
Overall, markets remain awaiting further actions by the Fed and their impact on the global economy. Whether the US economy can avoid a recession amid rate cuts remains an open question, but current investor sentiment is increasingly leaning towards an optimistic scenario.
The retail sector showed strong growth, leading the leaderboard amid a significant increase in JD Sports (JD.L) shares. The UK sportswear retailer rose 5.3% after reporting a strong improvement in core sales in the second quarter, spurring investors.
The energy sector was among the laggards, falling 0.6% as oil prices fell for a fifth straight session. Investors are concerned about a possible slowdown in global oil demand, putting pressure on companies in the sector.
Markets are focused on the upcoming flash purchasing managers' index (PMI) data for France, Germany, the UK and the eurozone, due between 07:15 and 08:30 GMT. These figures will help to gauge the current state of the region's economies.
Eurozone consumer confidence data is also due out today at 14:00 GMT. Later in the day, US PMI and initial jobless claims data will be released, which could have a significant impact on the market.
Among individual stocks, Aegon (AEGN.AS) was a notable loser, falling 4% after the Dutch insurer reported a decline in its key capital generation figure for the first half of the year. This caused concern among investors and led to a sell-off.
Meanwhile, Deutsche Bank (DBKGn.DE) shares rose 2.5% after the bank reached a settlement with more than half of the plaintiffs who had accused it of underpayment. The progress was welcomed by the market, which was reflected in the bank's share price rising.
Investors continue to closely monitor upcoming economic data, which could be key indicators for future market developments. Particular attention will be paid to the PMI and consumer confidence indicators, which will provide an indication of the current state of the European economy and may influence sentiment in other regions.
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