Stocks gain after Fed's 'change of tone'

European shares rallied after dovish comments by Federal Reserve officials and the prospect of more economic stimulus by China brought some risk appetite back to markets as investors continue to evaluate the potential impact of the Israel-Hamas conflict. 

Treasuries jumped, catching up with Monday’s global government bond rally, when cash trading in the US was closed. The yield on the policy-sensitive two-year Treasury dropped by the most since the end of August, while the benchmark 10-year had its best day since March. U.S. equity futures rose and the dollar extended its losing streak to a fifth day. 

The Stoxx Europe 600 index climbed more than 1%, heading for its best day in a month, with all industry sectors in the green. Miners led the advance after Bloomberg reported that China is preparing to unleash a new round of stimulus measures which may support metal p[rices. Anglo American advanced more than 5%, while Glencore and Rio Tinto added more than 3% each.

At the end of last week, traders had boosted bets on another Fed hike this after U.S. employment unexpectedly surged in September. That narrative switched on Monday, however, as central bank officials tamped down the speculation. Fed Vice Chair Philip Jefferson said officials could “proceed carefully” following the recent rise in Treasury yields, and Federal Reserve Bank of Dallas President Lorie Logan said the surge in long-term rates may mean less need for further tightening. Another slate of Fed speakers today may add to the picture.

“The latest comments from Fed speakers have had a clear risk-on influence on the market,” said Benjamin Melman, global chief investment officer at Edmond de Rothschild Asset Management. “There’s been a clear change of tone.”

China is considering raising its budget deficit for 2023  to help the economy meet the government’s annual growth target, Bloomberg reported. Policymakers are weighing the issuance of at least 1 trillion yuan ($137 billion) of additional sovereign debt for spending on infrastructure such as water conservancy projects.

An escalation of tensions in the Middle East, however, remains a risk for markets, with Israel mobilizing its military forces near Gaza, and questions being asked about Iran’s role in the bloody incursion.

The latest conflict comes at a time of ongoing geopolitical concerns, with markets also facing a period of moderating global economic growth, according to Solita Marcelli, chief investment officer for the Americas at UBS Global Wealth Management.

“Against this backdrop, we continue to prefer fixed income to equities,” Marcelli said. “We see a better risk-reward profile for fixed income, and we recommend investors consider buying high-quality bonds in the five- to 10-year maturity range. We foresee further cooling in inflation and slower global growth.”

Another risk for US stocks may come from fiscal policy constraints at a time when the Fed is still fighting high inflation, according to Morgan Stanley’s Michael Wilson. The strategist — among the most prominent bearish voices on Wall Street — said while the US government narrowly avoided a shutdown last week, “the lack of a resilient long-term structure that supports fiscal discipline” could have an impact on financial markets.

Key events this week:

• US wholesale inventories, Tuesday
• Fed’s Raphael Bostic, Christopher Waller, Neel Kashkari and Mary Daly speak at separate events, Tuesday
• Germany CPI, Wednesday
• NATO defense ministers meeting in Brussels, Wednesday
• Russia Energy Week in Moscow, with officials from OPEC members and others, Wednesday
• US PPI, Wednesday
• Minutes of Fed’s September policy meeting, Wednesday
• Fed’s Michelle Bowman and Raphael Bostic speak at separate events, Wednesday
• Japan machinery orders, PPI, Thursday
• Bank of Japan’s Asahi Noguchi speaks, Thursday
• UK industrial production, Thursday
• US initial jobless claims, CPI, Thursday
• European Central Bank publishes account of September policy meeting, Thursday
• Fed’s Raphael Bostic speaks, Thursday
• China CPI, PPI, trade, Friday
• Eurozone industrial production, Friday
• US University of Michigan consumer sentiment, Friday
• Citigroup, JPMorgan, Wells Fargo, BlackRock results as the quarterly earnings season kicks off, Friday
• G20 finance ministers and central bankers meet as part of IMF gathering, Friday
• ECB President Christine Lagarde, IMF Managing Director Kristalina Georgieva speak on IMF panel, Friday
• Fed’s Patrick Harker speaks, Friday

Some of the main moves in markets:

Stocks

• The Stoxx Europe 600 rose 1.4% as of 9:43 a.m. London time
• S&P 500 futures rose 0.2%
• Nasdaq 100 futures rose 0.2%
• Futures on the Dow Jones Industrial Average rose 0.2%
• The MSCI Asia Pacific Index rose 1.2%
• The MSCI Emerging Markets Index rose 0.7%

Currencies

• The Bloomberg Dollar Spot Index was little changed
• The euro rose 0.3% to $1.0598
• The Japanese yen fell 0.2% to 148.81 per dollar
• The offshore yuan was little changed at 7.2889 per dollar
• The British pound rose 0.2% to $1.2266

Cryptocurrencies

• Bitcoin rose 0.4% to $27,684.23
• Ether rose 0.9% to $1,590.84

Bonds

• The yield on 10-year Treasuries declined 14 basis points to 4.66%
• Germany’s 10-year yield advanced two basis points to 2.79%
• Britain’s 10-year yield was little changed at 4.47%

Commodities

• Brent crude was little changed
• Spot gold fell 0.2% to $1,857.86 an ounce

This story was produced with the assistance of Bloomberg Automation.