* Asia shares ex-Japan enjoy best day since Jan
* Much riding on Fed being open to easing, and soon
* Global bonds rally after Draghi flags stimulus
* Trump says to meet Xi at G20, trade talks to resume
(Updates throughout, changes byline, dateline)
By Sujata Rao
LONDON, June 19 (Reuters) - World stocks held near two-week
highs on Wednesday as investors bet on a worldwide wave of
central bank stimulus, with expectations building that the
United States and the euro zone may deliver interest rate cuts
as early as July.
Markets have been fired up by European Central Bank
President Mario Draghi's Tuesday volte-face on policy easing. In
one of the biggest policy reversals of his eight-year tenure,
Draghi flagged more policy easing if inflation failed to pick
up. However, German and U.S. bond yields which hit record lows
and two-year lows respectively after the speech, inched higher
to trade just off those levels DE10YT=RR US10YT=RR . European
shares too slipped off six-week highs .STOXX , and Wall Street
futures indicated a slightly weaker open ESc1 .
Some of the trepidation is down to the U.S. Federal
Reserve's ongoing meeting, with a decision due at 1800 GMT. It
is widely expected to follow the lead of the European Central
Bank and open the door to future rate cuts.
"It should be really clear to absolutely everyone that this
is a monetary policy turning point... Those rate cut
expectations have now shifted much closer," said Ulrich
Leuchtmann, head of currency and emerging markets research at
Commerzbank.
"Of course the other question is: What is the Fed doing? If
the Fed takes the fundamental risk of political pressure
seriously, they cannot do anything today," he said, noting that
President Donald Trump's strident calls for lower interest rates
posed a dilemma for the Fed.
But market sentiment has been buoyed also by news that Trump
will meet China's Xi Jinping at the G20 summit this month, even
though many doubt the two men can reach a breakthrough on ending
their trade dispute. MSCI's global equity index .MIWD00000PUS rose 0.4%, adding
to Tuesday's 1% gain, as Asian shares excluding Japan followed
the lead of their European and U.S. counterparts to jump almost
2% - their biggest one-day rally since January .MIAPJ0000PUS .
Tokyo and Shanghai too climbed almost 2% .N225 .SSEC
while Australia's main bourse hit an 11-year high .AXJO .
All eyes are now on the Fed, with Chairman Jerome Powell
holding a news conference after the announcement. Futures 0#FF: are almost fully priced for a quarter-point
easing in July and imply more than 60 basis points of cuts by
Christmas FEDWATCH .
As for Europe, markets have almost fully priced a cut in
September, though some analysts, such as those at Germany's
Commerzbank, now say rates will be cut in July, rather than in
the last quarter of the year as they had predicted earlier
ECB sources told Reuters Draghi had flagged his measures so
strongly that other board members would be unable to disagree
with him at their July 25 meeting. Yet all the clamour for easing creates risks policymakers
will disappoint.
"Market expectations for a dovish shift are nearly
universal, the only question seems to be the degree," Blake
Gwinn, head of front-end rates at NatWest Markets, said,
referring to the Fed.
"Markets will be looking for validation of this pricing," he
added. "We think this represents a fairly high bar for the Fed
to deliver a dovish surprise."
SUB-ZERO YIELDS
BofA Merrill Lynch's latest fund manager survey spoke
volumes about the sea change in sentiment. It showed investors
were dumping stocks and had upped bond allocations to nearly
eight-year highs. They also had crowded into safe-haven U.S.
Treasury bonds and cash The prospect of more policy easing and worries for the
growth outlook kept German yields DE10YT=RR close to the minus
0.33% record low hit on Tuesday, while Japanese yields
JP10YT=RR sank to the lowest since August 2016 at -0.145%.
Yields on the U.S. 10-year note US10YT=RR reached the
lowest since September 2017 at 2.016%, a world away from the
3.25% top touched in November last year.
The fallout in currencies has been significantly less,
mostly because it is hard for one to gain when all the major
central banks are under pressure to ease.
The euro did pull back after Draghi's comments, but at
$1.118 EUR=EBS it touched only a two-week low.
The dollar eased slightly on the yen to 108.3 JPY= , but
was flat versus a basket of currencies .DXY . The yuan touched
three-week highs versus the dollar on the trade news CNH=D3 .
In commodities, the rate-cut buzz kept gold near 14-month
highs at $1,345.16 per ounce XAU= . Brent crude futures too
rose 0.5%, thanks to the stimulus bets and hopes of a thaw in
Sino-U.S. ties LCOc1 .