Stocks hover near all-time highs, yen drops as Ueda disappoints hawks

By Sruthi Shankar and Stella Qiu

(Reuters) - World stocks hovered near record highs on Friday, underpinned by a big interest rate cut from the Federal Reserve earlier this week, while the yen eased after Bank of Japan Governor Kazuo Ueda tempered market expectations around imminent rate hikes.

The dollar climbed 1.2% on the Japanese currency to 144.29 - its strongest in two weeks - on the back of Ueda's remarks, having earlier fallen around 0.6% to 141.74 after the BOJ kept interest rates steady in a widely expected move.

The yen lost ground as Ueda gave few hints on when the central bank could raise rates again and said uncertainty around the U.S. economy and market volatility could impact its policy moves.

The dollar steadied after suffering losses earlier in the week after the Fed delivered a 50 basis point rate cut and assured investors the jumbo-sized reduction was a measure to safeguard a resilient economy, rather than an emergency response to recent weakness in the labour market. [FRX/]

"What Chairman Powell said was that they're carefully watching the labour market, and if it slows too much they're prepared to act," said Marija Veitmane, head of equity research at State Street Global Markets.

"Powell also said that he doesn't see the labour market as inflationary - that's a positive message for risky assets."

The MSCI index of world stocks was little changed after Thursday's 1.6% jump took it to a record high. It was headed for a 1.5% weekly rise.

European stocks dropped 0.8% from two-week highs, with automakers leading the slide after Mercedes-Benz cut its full-year profit margin target for the second time in less than two months, on the back of weakness in China. [.EU]

Wall Street futures were also lower, after the S&P 500 surged to a record close on Thursday. [.N]

CHINA WOES

In China, the central bank kept its benchmark lending rates on hold, countering expectations for a move lower. Chinese blue chips edged up 0.2% but remained close to a seven-month low touched earlier in the week.

Downbeat data in recent days has raised hopes of aggressive stimulus to prop up the world's second largest economy.

"Markets were really hoping that the policy action taken by Chinese authorities will work. They've done a lot of little things but unfortunately not enough to turn around the slowdown in economic activities," said State Street's Veitmane.

"It's a big source of weakness globally."

The onshore yuan strengthened to the highest in nearly 16 months after the People's Bank of China's surprise move, leading to intervention by state banks to prevent it from appreciating too fast.

Overnight, Wall Street finally had the time to digest the Federal Reserve's first rate cut of this cycle. With more easing to come, investors are counting on continued U.S. economic growth and better-than-expected jobless claims data added to the view that the labour market remained healthy.

Markets imply about a 40% chance the Fed will cut by another 50 basis points in November and have 72 bps priced in by year-end. Rates are seen at 2.83% by the end of 2025, which is now thought to be the Fed's estimate of neutral.

The British pound was buoyant at $1.3300, earlier rallying to the highest since March 2022.

Data on Friday showed British retail sales rose by a stronger-than-expected 1% in August and growth in July was revised up. The Bank of England held rates steady on Thursday.

Commodities also held on to their weekly gains. Gold touched a record high at $2,614 an ounce and oil prices were set for their second straight week of gain.

Brent futures slipped 0.5% to $74.49 a barrel, but are still up 4.6% this week. [O/R]

(Reporting by Stella Qiu and Sruthi Shankar; Editing by Christopher Cushing, Jamie Freed, Sam Holmes, Gareth Jones and Alex Richardson)