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World stocks gain as investors eye ECB rate cut

written by Bella Palmer

Investors expect the ECB to cut the benchmark rate by 25 bps to 3.75%

World stocks gained on Monday despite a subdued Wall Street following unexpected weakness in U.S. manufacturing data, feeding uncertainty about the U.S. interest rate outlook as the euro zone prepared for a rate cut on Thursday.

By early evening in New York, the MSCI All Country World Price Index gained 0.41%. U.S. stocks alternated between gains and losses, amid a reported technical glitch on the NYSE regarding "Limit Up-Limit Down" bands that sent dozen of stocks listed on the exchange into volatility pauses.

The exchange said it was investigating the problem and will provide information as soon as possible.

The S&P 500 index rose 0.1%, the Dow Jones Industrial Average declined 0.3%, and the Nasdaq Composite gained 0.6%. The pan-European STOXX index was 0.32% higher.

Benchmark U.S. Treasury yields dropped to a two-week low and the dollar dropped after data showed U.S. manufacturing activity slowed for a second consecutive month in May. New goods orders declined by the most in about two years.

The soft data supported speculation the Fed might cut rates this year, although some investors remained sceptical, since inflation remains above the Fed's 2% target.

In Europe, investors expect the ECB on Thursday to cut the benchmark rate by 25 bps to 3.75%.

We see inflation limiting how much central banks can cut interest rates, according to Jean Boivin, the head of Blackrock Investment Institute. We see them keeping rates high for longer.

Benchmark 10-year note yields shed 11 bps at 4.4021%, and dropped to 4.404%, the lowest since May 16. Two-year note yields dropped 7 bps to 4.823% and hit 4.816%, also the lowest since May 21.

The European Central Bank is considered almost certain to cut rates on Thursday, yet after last week's surprisingly strong euro zone inflation data, markets now price in fewer than 60 bps of easing.

Markets imply nearly an 80% probability the Bank of Canada will reduce rates at its meeting on Wednesday and nearly 60 bps of easing this year, though analysts hope the easing will be greater.


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