- Stocks jumped on Tuesday after the European Central Bank signaled it could cut interest rates this year, fueling optimism among traders that the Federal Reserve will follow suit.
- European Central Bank President Mario Draghi pledged to use rate cuts and other tools to hit inflation targets if economic conditions don’t improve.
- A sharp decline in the Empire State Manufacturing Survey also raised hopes that central bankers would take action to boost the US economy.
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Stocks jumped on Tuesday after European Central Bank President Mario Draghi pledged to use rate cuts and other tools to hit inflation targets if economic conditions don’t improve, raising hopes the Federal Reserve would follow suit.
The European Central Bank pledged to use tools such as interest-rate cuts and asset purchases to shore up the Eurozone economy if needed. ECB President Mario Draghi highlighted geopolitical tensions, protectionism, and vulnerable emerging markets as risks that have weighed on exports and manufacturing in a speech on Tuesday.
“In the absence of improvement, such that the sustained return of inflation to our aim is threatened, additional stimulus will be required,” he said. “Further cuts in policy interest rates and mitigating measures to contain any side effects remain part of our tools.”
Analysts noted the central banker’s sudden shift in rhetoric.
“Draghi’s comments appeared vigorously dovish and stand in high contrast to what he conveyed just earlier this month, that interest rates are expected to remain at present levels until at least mid-2020,” said Han Tan, market analyst at FXTM.
“Investors will be left to ponder whether sending interest rates into further negative territory would be the medicine that the EU economy requires,” he added.
The Federal Open Market Committee is meeting today and Wednesday, raising the prospect of the central bankers signalling their intention to cut rates later this year.
“This week’s FOMC meeting is the moment of truth for Fed watchers,” said Ipek Ozkardeskaya, senior market analyst at London Capital Group.
“A less dovish readjustment in the language could be a disappointment for the markets and send the US stock and bond markets tumbling,” she added. “Therefore, the Fed could choose to follow the market’s lead and deliver a sufficiently dovish verdict until the dust settles.”
Evidence of economic weakness and rising global tensions have raised hopes the Fed will take action. The Empire State Manufacturing Survey, a gauge of business conditions for manufacturers in the New York area, slumped a record 26.4 points to -8.6 in June. Its last negative reading was in October 2016.
The Trump administration also ordered an additional 1,000 troops to the Middle East in response to “hostile behavior” by Iran, which it has blamed for the recent attacks on two tankers in the Gulf of Oman. The Iranian government said it’s on track to exceed limits on its stockpile of enriched uranium before the end of this month.
Here’s the market roundup as of 10:29 a.m. ET:
- US stocks have jumped with the Dow Jones Industrial Average and S&P 500 up 1.2%, and the Nasdaq up 1.8%. Some of the biggest gainers included chipmakers Western Digital, Nvidia, Micron, and AMD, all up by around 5%.
- European equities rose with Germany’s DAX and the Euro Stoxx 50 up 2%, and Britain’s FTSE 100 up 1.4%. Shares in German energy group RWE, British equipment-rental group Ashtead, and French energy giant Engie all rose by about 4%.
- Asian indexes climbed with the Shanghai Composite up 0.1%, the SZSE Component up 0.3%, and Hong Kong’s Hang Seng up 1%.
- Crude oil prices have rallied with West Texas Intermediate up 2.3% at $53.40, and Brent crude up 1.5% at $61.80.
- Bitcoin was down 2.6% at $9,173. The cryptocurrency briefly passed the $9,400 mark on Monday, a 13-month high.