World markets experienced a downturn on Thursday, as central banks worldwide, including the U.S. Federal Reserve, indicated their continued stance on interest rate cuts, highlighting global economic uncertainty. These signals, coupled with concerns over trade wars and geopolitical tensions, kept the bears in control, driving European stock indexes nearly 1% lower early on. As investors sought safety, the dollar rose, government bonds saw increased demand, and gold reached a fresh record high.

Central Banks Maintain Cautious Stance Amid Rising Global Risks

The U.S. Federal Reserve, after its latest meeting, left interest rates unchanged. However, the central bank continued to project two quarter-percentage-point rate cuts by the end of the year. This outlook came alongside an upward revision of the inflation forecast for the year and a downward adjustment of the economic growth forecast, reflecting concerns about U.S. President Donald Trump’s tariff policies.

Despite these concerns, investors found some comfort in the Fed's "dot plot," with Chair Jerome Powell emphasizing that tariff-induced inflation would be "transitory" and largely confined to this year. This view helped dampen market fears, leading some to predict that the Fed would aggressively cut rates if U.S. unemployment starts to rise. The anticipation of these cuts drove gold to new heights, reaching $3,057.21 per ounce.

Global Bonds and the Dollar’s Movements

The bond market responded with U.S. Treasury yields dipping to 4.22%, while Germany’s Bund yields eased to 2.77%. This followed a dip to a two-week low of 2.748% the day before, a sharp contrast to last week’s 1.5-year high of 2.938%. These movements were a sign of investors flocking to the safety of government bonds, further exerting downward pressure on the U.S. dollar.

Despite these developments, the dollar edged up 0.2%, rising to $1.0893 against the euro, $1.2971 against the British pound, and 148.40 yen. The British pound had briefly reached a four-month high of $1.3015 before this pullback.

Interest Rate Decisions Around the Globe

Several central banks outside the U.S. also made important decisions on interest rates. The Bank of England, like the Fed, is expected to keep rates steady, with a forecast of holding at 4.5%. Analysts expect the BoE’s decision to reflect a desire for further disinflation before any rate changes are made. Meanwhile, Switzerland's central bank cut its rates to 0.25%, citing concerns about U.S. trade tariffs. Sweden’s central bank, on the other hand, kept its borrowing costs at 2.25%, dealing with persistent inflation and a slow economy.

Despite these cuts, there was minimal market reaction to these decisions, with the Swiss franc seeing only a fractional dip.

China's Economic Slowdown and Market Struggles

In Asia, the post-Fed optimism failed to buoy the markets, with MSCI's broad index of Asia-Pacific shares outside Japan finishing flat. A significant contributor to this stagnation was China and Hong Kong’s disappointing performance. The Hang Seng Index suffered a 2.2% drop, its worst of the month, as Chinese tech giants like Tencent and Baidu tumbled by nearly 4%. After strong rallies earlier this year—Tencent surged 30%, and Baidu skyrocketed by 70%—the valuation of these companies appeared to be unsustainable, leading to a market correction.

Carlos von Hardenberg, co-founder of MCP Emerging Markets, described the recent rally in Chinese tech stocks as a "suckers rally," noting that these stocks were becoming vastly overvalued and that the surge could evaporate overnight due to growing concerns over technology leadership.

Currency Movements: China, Australia, and New Zealand

The Chinese yuan remained relatively stable at 7.2354 per dollar, while its offshore counterpart fell slightly by 0.1% to 7.2383 per dollar. This stability was in line with China’s central bank holding its benchmark lending rates steady for the fifth consecutive month. Meanwhile, the Australian dollar tumbled by 1% following weaker-than-expected employment data. Conversely, New Zealand’s economy showed stronger-than-forecast growth, which helped the Kiwi dollar avoid a similar drop.

Oil Prices Climb Amid Middle East Tensions

Commodity markets also saw movements, with oil prices ticking higher. The escalation of tensions in the Middle East, particularly due to Israeli airstrikes across Gaza and the collapse of the ceasefire with Hamas, spurred concerns about further instability in the region. Brent crude futures rose by 0.6% to $71.24 per barrel, while U.S. West Texas Intermediate (WTI) crude also saw similar gains, reaching $67.52 per barrel.

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