Asian markets rallied Friday as comments from a top Federal Reserve official were pounced on by investors as indicating the central bank will unveil a deep interest rate cut at the end of the month.
John Williams, the influential vice chairman of the Fed’s policy-setting board, said in a speech that central banks should move quickly to support the economy when borrowing costs were already low.
He pointed to studies suggesting that when there are few stimulus options available, officials should ‘move more quickly than you otherwise might’ rather than waiting ‘for disaster to unfold’.
While a spokesman later clarified that Williams was not outlining Fed policy and was not flagging a half-point cut, analysts said the remarks provided an insight into how officials were thinking.
Markets have been wavering this week over how big the bank’s expected reduction would be, with 25 basis points priced in but traders hoping for 50.
‘Williams’ remarks put probabilities of multiple rate cuts higher after strong economic indicators had put doubts on the number of rate reductions this year and how deep the cut will be,’ said OANDA senior market analyst Alfonso Esparza.
Wall Street ended in positive territory and Asia finished the week on a strong note, despite concerns about the global outlook and a lack of progress in China-US trade talks.
Tokyo ended two per cent higher, while Hong Kong added more than one per cent and Shanghai finished up 0.8 per cent.
Seoul jumped 1.4 per cent, Singapore gained 0.4 per cent and Sydney put on 0.8 per cent with Taipei adding 0.7 per cent. Wellington, Manila and Jakarta were also well up but Mumbai fell more than one per cent in disappointment with government plans for a super-rich tax.
In early trade London added 0.6 per cent, Paris rose 0.8 per cent and Frankfurt was up 0.6 per cent.
Jeffrey Kleintop, chief global investment strategist at Charles Schwab & Co, warned that weakness in the world economy would eventually drag on markets.
‘I don’t think a few rates cuts is going to make the difference, whether it’s 25 or 50 basis points at the end of this month,’ he told Bloomberg TV. ‘While the bond market is pricing in a realistic probability of the slowdown, stocks have gone the other direction this year and may be in for a surprise.’
Bets on lower rates were also providing support to higher-yielding, riskier currencies with the Australian dollar and South Korean won climbing 0.6 per cent and the Indonesian rupiah 0.5 per cent higher. South Africa’s rand, the Turkish lira and Mexican peso were also well up.
However, the greenback did claw back slightly against its major peers following steep losses on Thursday.
The softer dollar was also helping oil prices rally, while Donald Trump’s claims that the US had downed an Iranian drone that threatened an American naval vessel also provided strong support.
However, Vanguard Markets’ Stephen Innes said the commodity remained under pressure from concerns about demand, despite moves to loosen monetary policy.
‘It’s not central bank liquidity that oil markets need but global economic growth,’ he said. ‘All the money in the world isn’t going to alleviate the fact markets are mired in a trade war-induced global economic slump that is factoring in both consumer and industrial consumption metrics.’
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