GLOBAL MARKETS-Global stocks rally, bond yields plunge after Fed hints at rate cuts

* Many Fed policy makers now see rate cuts this year
* U.S. stock prices near record peak, 10-year yield near 2%
* Markets price in 75 bp cuts by year-end in total
* Asian stock markets: https://tmsnrt.rs/2zpUAr4

By Hideyuki Sano
TOKYO, June 20 (Reuters) - A gauge of global stock markets
edged near this year's peak while benchmark U.S. Treasury yields
and the dollar dropped after the Federal Reserve signalled
possible interest rate cuts later this year.
MSCI's broadest index of Asia-Pacific shares outside Japan
.MIAPJ0000PUS rose 0.2% while Japan's Nikkei .N225 gained
0.5%.
The MSCI ACWI .MIWD00000PUS , which incorporates readings
of 49 equity markets across the world, gained 0.2%, having
recovered a large part of its losses made after U.S. President
Donald Trump threatened new tariffs on all of China's imports
last month.
Signs that China and the United States are returning to the
negotiating table after a six-week hiatus also bolstered risk
sentiment.
The rally in stocks comes as a host of Asian central banks
are scheduled to hold policy meetings later in the day, with
most expected to flag moves toward looser monetary settings.
On Wall Street, the S&P 500 .SPX gained 0.3% to 2,926,
just 19 points off its record closing high hit on April 30.
The U.S. Federal Reserve said on Wednesday it was ready to
battle growing global and domestic economic risks with interest
rate cuts beginning as early as next month, as it took stock of
rising trade tensions and growing concerns about weak inflation.
The bulk of Fed policymakers slashed their rate outlook for
the rest of the year by roughly half a percentage point, and Fed
Chairman Jerome Powell said others agree the case for lower
rates is building.
Many investors viewed the overall tone as more dovish than
their expectations, sending the 10-year U.S. Treasuries yield
US10YT=RR to as low as 1.986%, its lowest level since November
2016.
The two-year yield US2YT=RR fell to 1.721%, a level last
seen in November 2017.
Money market derivatives, such as Fed funds futures 0#FF:
and overnight indexed swaps USDOIS , are fully pricing in a
rate cut of 25 basis points at next policy review on July 30-31,
with about one-third chance of a bigger 50 basis point cut.
A total of 75 basis point reduction is priced in by the end
of year.
However, such aggressive rate cuts when the stock prices are
so close to record peaks would be rare, if not unprecedented,
making some investors nervous about whether the Fed may be
over-reacting.
"It seems the Fed is getting ahead of risk and doing
whatever it takes to avoid downside implications due to a
potential slowdown," said Robin Anderson, senior global
economist at Principal Global Investors in Des Moines, Iowa in
the United States. "However, in the event inflation picks backs
up, I'm apprehensive the Fed could be behind the curve if rates
do in fact get cut too soon."
Many investors think rate cut expectations could be rolled
back if Washington and Beijing make some headway in their talks.
"While we expect 'insurance' rate cuts this year, we think
the timing and magnitude of any policy easing is uncertain and
somewhat dependent on U.S.-China trade relations," said Andrew
Wilson, CEO of Goldman Sachs Asset Management for EMEA and
global Head of fixed income.
U.S. Trade Representative Robert Lighthizer said he will
confer with his Chinese counterpart Vice Premier Liu He before
next week's meeting between President Donald Trump and Chinese
President Xi Jinping in Osaka. The Chinese yuan has recovered over the past couple of days
on hopes of U.S.-China talks next week on the sideline of Group
of 20 summit.
The offshore yuan traded at 6.8911 to the dollar CNH= ,
having hit a five-week high of 6.8880 overnight.
The euro bounced to $1.1254 EUR= after the Fed's dovish
signals undermined the dollar's yield attraction, pushing the
common currency away from this week's low of $1.1181 touched on
Tuesday.
The dollar hit a five-month low of 107.72 yen JPY= . The
Bank of Japan is widely expected to keep its policy on hold on
Thursday.
The British pound rebounded to $1.2648 GBP=D4 from
Tuesday's 5-1/2-month low of $1.2507 as investors trimmed their
short bets before the Bank of England's policy meeting on
Thursday where it may strike a more hawkish tone than those of
its peers.
Gold also shot up to as high as $1,362.20 per ounce XAU= ,
the highest level since April last year.
Oil prices held firm, underpinned by a larger-than-expected
decline in U.S. crude inventories.
U.S. West Texas Intermediate (WTI) crude CLc1 futures rose
1.25% to $54.43 a barrel.
Members of the Organization of the Petroleum Exporting
Countries (OPEC) agreed to meet on July 1, followed by a meeting
with non-OPEC allies on July 2, after weeks of wrangling over
dates. Oil producers will discuss whether to extend a deal on
cutting 1.2 million barrels per day of production that runs out
this month.

(Editing by Sam Holmes)