Equities and bonds slip as investors pare rate cut bets
Political developments in the US and Middle East are also keeping traders on edge
16 January 2024 - 13:18
byReuters
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London/Singapore — Shares slipped and the dollar and US bond yields rose on Tuesday as hawkish remarks from central bank policymakers in Europe contributed to markets reducing bets that global interest rate cuts could come as early as March.
Investors are also digesting a raft of political and geopolitical developments, including Donald Trump securing a resounding win in the first 2024 US Republican presidential contest in Iowa on Monday, and developments in the Red Sea, Gaza and Ukraine.
Europe’s Stoxx 600 index and MSCI’s broadest index of Asia-Pacific shares outside Japan dropped to the lowest since mid-December, with the broad European benchmark last down about 0.5%, moving further away from a two-year peak at the start of January.
S&P 500 futures were down 0.5%, suggesting the benchmark won’t immediately renew its attempt on a fresh all-time high. On Friday, it got as close as 0.3% to a record intraday high recorded in early 2022. US markets were closed for the Martin Luther King holiday on Monday.
Gains in stocks were underpinned by sharp declines in bond yields in November and December as investors brought forward expectations of rate cuts by central banks. Those have since reversed somewhat and on Tuesday, the benchmark 10-year US treasury yield was up 5 basis points (bp) just above 4%.
Market pricing now reflects about a 70% chance of a Federal Reserve rate cut in March, down from more than 80% a week ago, and for the first European Central Bank (ECB) rate cut to begin in April, with traders having earlier expected March.
Contributing to those revisions, ECB officials have been out in force this week, with hawkish speakers such as Bundesbank president Joachim Nagel on Monday pushing back firmly on expectations of rate cuts.
French central bank governor Francois Villeroy de Galhau said on Tuesday the ECB’s next move would be a rate cut but its timing was an open question.
“Rates are likely to be cut but not as early as markets now price in,” said Guy Miller, chief market strategist and economist, Zurich Insurance Group “Our view is that inflation will come down towards targets over the course of the year, but in a choppy manner.”
Federal Reserve Board governor Christopher Waller’s speech on the economic outlook at 4pm GMT, will be closely watched too; markets heartily cheered a shift in his hawkish views in November.
Earnings and geopolitics
Investors are also keeping a close eye on fourth-quarter corporate results. US banks kicked off earnings season last Friday, reporting lower profits.
“You’ve got some darlings that are very much loved, that rerated in the last couple of months on the back of that rally as everyone thought we’d hit peak interest rates. The question is, are we happy that earnings are going to meet those expectations?” said Georgina Cooper global equities portfolio manager at Newton Investment Management.
“We saw last year quite a lot of those highly rated names can come off very quickly if they don’t meet expectations.”
There was also plenty of news around the world to keep on top of, and Yemen’s Houthi movement will expand its targets in the Red Sea region to include US ships, an official from the Iran-allied group said on Monday.
On the commodity markets, oil has been supported by the instability in the shipping lane and Brent was last up 0.6% at 78.64 a barrel. Iron ore extended falls to touch more than five-week lows in Singapore on China’s decision on Monday to skip an expected rate cut unnerved investors. That dragged on mining stocks in Europe and Australia as well as the Australian dollar, which weakened 0.9%.
The pound was another underperformer in currency markets, down 0.66% against the dollar at $1.2643 after data showed growth in UK wages slowed in the three months through November, supporting the idea that the Bank of England will cut interest rates sharply this year.
That was a contributor, along with the higher US yields, in pushing the dollar index, which racks the greenback against six peers, up 0.52% to a one month high.
Support our award-winning journalism. The Premium package (digital only) is R30 for the first month and thereafter you pay R129 p/m now ad-free for all subscribers.
Equities and bonds slip as investors pare rate cut bets
Political developments in the US and Middle East are also keeping traders on edge
London/Singapore — Shares slipped and the dollar and US bond yields rose on Tuesday as hawkish remarks from central bank policymakers in Europe contributed to markets reducing bets that global interest rate cuts could come as early as March.
Investors are also digesting a raft of political and geopolitical developments, including Donald Trump securing a resounding win in the first 2024 US Republican presidential contest in Iowa on Monday, and developments in the Red Sea, Gaza and Ukraine.
Europe’s Stoxx 600 index and MSCI’s broadest index of Asia-Pacific shares outside Japan dropped to the lowest since mid-December, with the broad European benchmark last down about 0.5%, moving further away from a two-year peak at the start of January.
S&P 500 futures were down 0.5%, suggesting the benchmark won’t immediately renew its attempt on a fresh all-time high. On Friday, it got as close as 0.3% to a record intraday high recorded in early 2022. US markets were closed for the Martin Luther King holiday on Monday.
Gains in stocks were underpinned by sharp declines in bond yields in November and December as investors brought forward expectations of rate cuts by central banks. Those have since reversed somewhat and on Tuesday, the benchmark 10-year US treasury yield was up 5 basis points (bp) just above 4%.
Market pricing now reflects about a 70% chance of a Federal Reserve rate cut in March, down from more than 80% a week ago, and for the first European Central Bank (ECB) rate cut to begin in April, with traders having earlier expected March.
Contributing to those revisions, ECB officials have been out in force this week, with hawkish speakers such as Bundesbank president Joachim Nagel on Monday pushing back firmly on expectations of rate cuts.
French central bank governor Francois Villeroy de Galhau said on Tuesday the ECB’s next move would be a rate cut but its timing was an open question.
“Rates are likely to be cut but not as early as markets now price in,” said Guy Miller, chief market strategist and economist, Zurich Insurance Group “Our view is that inflation will come down towards targets over the course of the year, but in a choppy manner.”
Federal Reserve Board governor Christopher Waller’s speech on the economic outlook at 4pm GMT, will be closely watched too; markets heartily cheered a shift in his hawkish views in November.
Earnings and geopolitics
Investors are also keeping a close eye on fourth-quarter corporate results. US banks kicked off earnings season last Friday, reporting lower profits.
“You’ve got some darlings that are very much loved, that rerated in the last couple of months on the back of that rally as everyone thought we’d hit peak interest rates. The question is, are we happy that earnings are going to meet those expectations?” said Georgina Cooper global equities portfolio manager at Newton Investment Management.
“We saw last year quite a lot of those highly rated names can come off very quickly if they don’t meet expectations.”
There was also plenty of news around the world to keep on top of, and Yemen’s Houthi movement will expand its targets in the Red Sea region to include US ships, an official from the Iran-allied group said on Monday.
On the commodity markets, oil has been supported by the instability in the shipping lane and Brent was last up 0.6% at 78.64 a barrel. Iron ore extended falls to touch more than five-week lows in Singapore on China’s decision on Monday to skip an expected rate cut unnerved investors. That dragged on mining stocks in Europe and Australia as well as the Australian dollar, which weakened 0.9%.
The pound was another underperformer in currency markets, down 0.66% against the dollar at $1.2643 after data showed growth in UK wages slowed in the three months through November, supporting the idea that the Bank of England will cut interest rates sharply this year.
That was a contributor, along with the higher US yields, in pushing the dollar index, which racks the greenback against six peers, up 0.52% to a one month high.
Gold dipped to at $2,041 an ounce.
Reuters
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