LONDON (Reuters) – European shares climbed on Friday as hopes that central banks would loosen policy offset trade friction and the threat of global recession, putting them on track for their best week in two months.
FILE PHOTO: The London Stock Exchange Group offices are seen in the City of London, Britain, December 29, 2017. REUTERS/Toby Melville/File Photo
The Euro STOXX 600 was up 0.9% as France’s main index outperformed, setting European stocks on course for their biggest weekly gain since early April. Oil stocks led the gains as crude jumped more than 2%.
Wall Street futures signaled a positive opening for U.S. markets, too.
Investors around the globe are focused on the timing of an interest rate cut by the U.S. Federal Reserve. Markets have fully priced in a cut at the Fed’s July 31 meeting and two more by mid-2020. Some expect three cuts by the end of this year.
But a cut is not guaranteed. And the potential for central banks to disappoint markets was highlighted on Thursday, when euro zone stocks wilted after the European Central Bank declined to hint it would cut rates soon.
“The fact is that market participants are already betting on the first (Fed) cut in July, which looks a bit early in my view,” said Christophe Barraud, chief economist and strategist at Market Securities, a brokerage in Paris.
The prospect of a more dovish at the Fed underscores the concern with which central banks are assessing the global economy. Many see trade tensions and a tilt toward protectionism as presenting risks of recession.
U.S. President Donald Trump has threatened to impose a 5% tariffs on all exports from Mexico unless it curbs the flow of Central Americans heading to the United States.
The prospect of those tariffs has rattled global financial markets as the U.S.-China trade conflict rumbles on.
Trump said on Thursday he would decide after a G20 meeting in Japan later this month whether to carry out his threat to hit Beijing with new tariffs on at least $300 billion worth of Chinese goods.
With that escalation looming, markets are assessing how global central banks will respond to signs of a downturn. Data that could affect any Fed loosening are in focus, starting with U.S. non-payroll farms data due at 1430 GMT.
Forecasts are for U.S. jobs to rise in May, though doubts have seeped in after poor numbers on private hiring released earlier in the week.
Any move from the Fed is widely seen as influencing how other major central banks will act, even if the ECB and Bank of England have less room to maneuver with uncertainty over Brexit still pervasive.
Edward Park, deputy chief investment officer at Brooks Macdonald, said central banks have appeared sanguine at how markets have priced in expectations for looser policy, which in turn has boosted optimism.
“The fact central banks seem willing to let markets price in a lot more dovish expectations has really helped sentiment,” he said.
Asia had earlier enjoyed an upbeat day. Indexes in Japan, Australia and South Korea all gained between 0.4% and 0.8 %, though bourses in Chinese and Hong Kong were closed for a public holiday.
MSCI world equity index, which tracks shares in 47 countries, edged up 0.2%.
In currency markets, the dollar was set for its worst week since March before the U.S. employment data. Analysts said that currency traders were bracing for weaker numbers, although they added the data would be unlikely to move the dollar much, barring major surprises.
“The data would have to surprise significantly to the downside, based on the analysts consensus, for the markets to act more significantly,” said Thu Lan Nguyen, FX Strategist at Commerzbank in Frankfurt.
The dollar was trading at 97.058 against a basket of six other currencies, up 0.06% on the day and a gain of 0.3% from Wednesday’s eight-week low.
In China, central bank chief Yi Gang said there was plenty of room for both fiscal and monetary policy easing should the trade war with the United States escalate. The comments sent the dollar 0.4% higher in a thin Asian market.
Brent crude futures were up 1.8% at $62.75 a barrel by 0835 GMT amid signs that OPEC and other producers may extend their supply cuts. They gained 1.7% on Thursday.
Reporting by Tom Wilson; additional reporting by Helen Reid; editing by Larry King