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BOND MARKETS RALLY AS THE ECB AND BANK OF CANADA CUT INTEREST RATES
Data Sourced from FE Analytics, and Bloomberg Finance LP
BOND MARKETS RALLY AS THE ECB AND BANK OF CANADA CUT INTEREST RATES
This week brought the first interest rate cuts for developed economies as the inflation caused by pandemic-era shortages and stimulus has slowed enough for central banks to begin easing. The shift to rate cuts in Canada and the Eurozone is significant as it shows a high level of confidence that inflation is now less of a risk and attention is turning towards economic growth.
However, the positivity in bond markets this week has more to do with hopes that the Federal Reserve may be able to cut rates after all. The market’s ability to forecast Federal Reserve rate cuts is only slightly less reliable than the Conservatives’ analysis of their own and Labour’s tax policies. It was only two weeks ago that markets were full of gloom and another rate hike was being factored in. This week optimism has returned as the US jobs markets shows some signs of cooling and markets are looking for when, not if, the US and UK will be able to join in with rate cuts of their own.
RATES: BONDS RISE AS ECB AND BANK OF CANADA CUT RATES
The European Central Bank and Bank of Canada both cut interest rates by 0.25% in the face of falling inflation. Although European CPI increased last month, inflation
in the Eurozone is running at 2.4% and CPI in Canada slowed to 2.7% in April. The cuts take the ECB deposit rate to 3.75% and the main Canadian rate drops to 4.75%. The ECB cautioned investors not to pre-judge future rate decision and warned that inflation is likely to remain above target well into next year.Meanwhile, signs that the US jobs market is cooling helped rekindle hopes of an earlier rate cut by the Federal Reserve. Government bonds declined last month as investors turned negative on the chance of rate cuts in the US and UK. But a more optimistic outlook for rate cuts spurred a big rally in government bonds which pushed down bond yields. The yields on government bonds from the US, UK, Canada, Australia and many major European governments fell sharply as bonds reversed much of their recent decline.
TECH: NVIDIA RISES AGAIN AS CHIP MAKERS LIFT GLOBAL EQUITIES
Shares in US chipmaker Nvidia have continued their astonishing growth as US tech stocks helped the broader US market to rise. Nvidia announced the launch of its
latest AI chip, after releasing its last update in March. This helped its shares to rise a further 10%. Its shares have risen 30% over the last month and are up 140% so far this year. Other semiconductor stocks have also been rising and Qualcomm, Broadcom, Micron and Advanced Micro Devices are all up between 10% and 20% over the last month. This is partly due to renewed optimism about Federal Reserve interest rate cuts, and these gains have lifted the broader US index.The positivity from US stocks has been reflected in rising equity markets in other developed economies, with Japanese, European, Australian indices all recording gains. The interest in AI is also helping chip makers outside the US. TSMC in Taiwan and ASML in the Netherlands are both up around 45% so far this year.
UK: RESHUFFLE OF FTSE 100 SEES OCADO AND ST JAMES’S PLACE DROP OUT
Online grocer Ocado and wealth adviser St James’s Place are set to leave the FTSE 100 at the next rebalance. This caps a difficult two years for the businesses as a range of different problems has caused their shares to fall around 60%. Industrial parts supplier RS Group is also set to leave as they are replaced by housebuilder Vistry,
cyber security firm Darktrace and corporate landlord LondonMetric. St James’s Place has dropped sharply this year as regulatory scrutiny forced it to revise its customer charges. It is the latest financial services firm to drop out of the large cap index following the recent departure of Hargreaves Lansdown and the removal of Hiscox and Abrdn last year.Darktrace’s promotion is likely to be short-lived as it is subject to a takeover bid by American investment firm Thoma Bravo. The bid values Darktrace at £4.3bn and has helped drive the share price up far enough for it to be re-admitted to the FTSE 100. Vistry is the second building stock to return to the FTSE 100 this year after Persimmon’s promotion in January.
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