Investor hopes that monetary conditions might be loosening bolstered the MSCI’s gauge of stocks across the globe by 0.46% to a level not seen since October 2022

World stocks soar to highest level in more than a year on Wednesday, while the U.S. dollar reached a five-month low, as expectations mounted that some central banks will start to cut interest rates early next year.

In line with expectations of lower interest rates, the benchmark 10-year Treasury yield dropped to a five-month low, while the two-year Treasury yield dropped to a low not seen in seven months.

Investor hopes that monetary conditions might be loosening bolstered the MSCI’s gauge of stocks across the globe by 0.46% to a level not seen since October 2022.

On Wall Street, the Dow Jones Industrial Average gained 0.21%, while the S&P 500 and the Nasdaq Composite were flat.

European shares rose 0.21%, with trade subdued due to public holidays in the region.

Analysts said the main risk for markets was that rates might not drop as fast as expected.

If global equity markets have one Achilles’ heel going into January 2024, it is the hope that the Federal Reserve will be methodically and consistently cutting interest rates throughout the year, said Nicholas Colas, Co-founder of DataTrek Research.

The benchmark 10-year Treasury yield dropped to 3.793%, and the 2-year yield pulled back to 4.2375%.

Expectations of rate cuts also dragged on the U.S. dollar, which dropped 0.51% against six major currencies to a level last seen on July 27.

The jovial mood in world equity markets and a sluggish dollar lifted the euro by 0.54% to $1.1102, more than a four-month high.

If the Fed cuts rates because inflation has come so far down that they do not want policy to unintentionally tighten then that is probably a good scenario, said Lou Brien, market strategist at DRW Trading in Chicago.