World stocks experienced a significant rally on Wednesday, driven by optimism surrounding the imminent conclusion of the U.S. federal shutdown, which has contributed to uncertainty in the economic landscape. European equities surged to record highs, while U.S. futures indicated a positive start for Wall Street. Notably, Japan’s blue-chip Nikkei and broader Asian markets also saw gains of approximately 0.4%.
The Republican-controlled House of Representatives is slated to vote later on Wednesday on a compromise plan aimed at restoring funding to government agencies, effectively bringing an end to the shutdown that began on October 1. This political development is seen as crucial in alleviating concerns regarding potential economic slowdowns.
Michael Metcalfe, the head of macro strategy at State Street, commented on the situation, stating, “There was always a risk that if the shutdown continued, further growth would be impacted and so data would be hard to read.” The resolution of the shutdown is viewed as a relief for investors, eliminating fears of a slowdown driven by stalled government operations.
A key focus for market watchers is the U.S. jobs data, which has been on hold due to the shutdown. Investors are particularly interested in whether the U.S. Federal Reserve (Fed) will decide to cut interest rates in December. Recent weekly jobs data from ADP indicated that private employers had reduced their workforce by an average of 11,250 jobs in the four weeks ending October 25. Current market expectations stand at a 64% probability of a 25-basis-point cut by the Fed next month.
For the equity market rally to sustain, Metcalfe emphasized the necessity for the data to be soft enough to justify a rate cut, while also not being overly negative, which might raise fears of an economic slowdown.
In Japan, the Topix index climbed over 1% to reach a new record high, although SoftBank Group’s shares fell by 3.5%, bringing its month-to-date losses to approximately 19% after announcing the sale of its entire stake in Nvidia.
Currency markets spotlighted the yen, which dropped to nine-month lows around 154.79 against the dollar before recovering slightly following comments from Japan’s Finance Minister, Satsuki Katayama. She acknowledged that the negative consequences of a weak yen have become increasingly evident. The yen has declined about 0.8% this week, impacted by a broader risk-on sentiment tied to the optimism surrounding the end of the U.S. shutdown, as well as expectations for more fiscal stimulus from new Prime Minister Sanae Takaichi.
Chris Turner, ING’s global head of markets, noted that strong direct investment into the U.S. is one factor supporting the dollar’s strength against the yen. He pointed out that many investors may hesitate to sell dollar/yen around the psychological resistance level of 155, fearing a potential surge towards 160 in light of thinning year-end trading conditions.
Regarding other currencies, the dollar index, which measures the currency against a basket of major rivals, increased by 0.1% to reach 99.574. The euro held steady at approximately $1.1582, while sterling slid slightly to around $1.3124. The bond market in the U.K. showed slight underperformance as political dynamics gained attention, particularly regarding rumors around British Prime Minister Keir Starmer.
In the commodities market, oil prices softened but retained much of their recent gains, buoyed by the prospect of increased demand following an end to the U.S. government shutdown. Brent crude futures dipped by 29 cents, or 0.3%, to around $65 a barrel, while U.S. West Texas Intermediate crude fell by 0.4% to $60.77 a barrel. Meanwhile, gold prices edged down by 0.1% to approximately $4,131.
