LONDON: World stocks held near two-week highs on Wednesday as investors bet on a worldwide wave of central bank stimulus, with expectations building that the United States and the euro zone may deliver interest rate cuts as early as July.
Markets have been fired up by European Central Bank President Mario Draghi's Tuesday volte-face on policy easing. In one of the biggest policy reversals of his eight-year tenure, Draghi flagged more easing if inflation failed to pick up.
But some caution seeped in after the previous day's frenzy.
German and U.S. bond yields, which hit record lows and two-year lows respectively after Draghi's comments, inched higher to trade just off those levels.
European shares slipped off six-week highs and Wall Street futures indicated a slightly weaker opening on Wednesday.
Some of the trepidation is down to the U.S. Federal Reserve's meeting, the decision of which is due at 1800 GMT. It is widely expected to follow the lead of the European Central Bank and open the door to future rate cuts.
"It should be really clear to absolutely everyone that this is a monetary policy turning point ... Those rate cut expectations have now shifted much closer," said Ulrich Leuchtmann, head of currency and emerging markets research at Commerzbank.
"Of course the other question is: What is the Fed doing? If the Fed takes the fundamental risk of political pressure seriously, they cannot do anything today," he said, noting that President Donald Trump's strident calls for lower interest rates posed a dilemma for the Fed.
But market sentiment has been buoyed also by news that Trump will meet Chinese leader Xi Jinping at the G20 summit this month, even though many doubt the two men can reach a breakthrough on ending their trade dispute.
MSCI's global equity index rose 0.4per cent, adding to Tuesday's 1per cent gain, as Asian shares excluding Japan followed the lead of their European and U.S. counterparts to jump almost 2per cent - their biggest one-day rally since January.
Tokyo and Shanghai too climbed almost 2per cent while Australia's main bourse hit an 11-year high. New York's S&P500 jumped almost 1per cent on Tuesday to approach recent record highs.
(Graphic: S&P500 approaches record high - https://tmsnrt.rs/2Y7dDQE)
All eyes are now on the Fed, with Chairman Jerome Powell holding a news conference after the announcement.
Futures are almost fully priced for a quarter-point easing in July and imply more than 60 basis points of cuts by Christmas.
As for Europe, markets have almost fully priced a cut in September, though some analysts, such as those at Germany's Commerzbank, now say rates will be cut in July, rather than in the last quarter of the year as they had predicted earlier.
ECB sources told Reuters Draghi had flagged his measures so strongly that other board members would be unable to disagree with him at their July 25 meeting.
Yet all the clamor for easing creates risks that policymakers will disappoint.
"Market expectations for a dovish shift are nearly universal, the only question seems to be the degree," said Blake Gwinn, head of front-end rates at NatWest Markets, referring to the Fed.
"Markets will be looking for validation of this pricing," he added. "We think this represents a fairly high bar for the Fed to deliver a dovish surprise."
BofA Merrill Lynch's latest fund manager survey spoke volumes about the sea change in sentiment. It showed investors were dumping stocks and had upped bond allocations to nearly eight-year highs. They also had crowded into safe-haven U.S. Treasury bonds and cash.
The prospect of more policy easing and worries for the growth outlook have sent global bond yields tumbling this year.
German yields were close to the minus 0.33per cent record low hit on Tuesday, while Japanese yields sank to the lowest since August 2016 at -0.145per cent.
(Graphic: Multiverse bond index - https://tmsnrt.rs/2Y0uHbg)
Yields on the U.S. 10-year note reached their lowest since September 2017 at 2.016per cent, a world away from the 3.25per cent top touched in November last year. The yield rose slightly from those lows but is down some 60 bps since January.
(Graphic: German, US bond yields in sharp falls this year - https://tmsnrt.rs/2Y7buo4)
The fallout in currencies has been significantly less, mostly because it is hard for one to gain when all the major central banks are under pressure to ease.
The euro did pull back after Draghi's comments, but at US$1.118 it touched only a two-week low.
The dollar eased slightly on the yen to 108.3, but was flat versus a basket of currencies. The yuan touched three-week highs versus the dollar on the trade news.
In commodities, the rate-cut buzz kept gold just off 14-month highs at US$1,345.16 per ounce. Brent crude futures however slipped 0.6per cent to US$61.75 a barrel, pressured by economic growth worries.
(Reporting by Sujata Rao; Additional reporting by Karin Strohecker in London and Wayne Cole in Sydney; Editing by Hugh Lawson)