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Stocks steady, yields dip ahead of action-packed week
Global Banking & Finance Review®
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By Alun John and Kevin Buckland
LONDON/TOKYO (Reuters) -European shares were at their highest since January 2022 and bond yields dipped on Monday, at the start of a packed week of big corporate earnings, European inflation data, Federal Reserve and Bank of England meetings and U.S. jobs numbers.
Europe’s broad STOXX 600 index briefly touched a fresh two-year high and was last flat on the day after its biggest weekly gain in over two months last week. [.EU]
U.S. share futures were also steady, suggesting no immediate threat to the S&P 500’s position at all-time highs, boosted by data this year showing economic growth is holding up while inflation continues to fall, potentially allowing the Federal Reserve to start cutting interest rates. [.N]
Asian shares rose as new steps by Beijing to stabilise the local market outweighed the drag on sentiment from the liquidation of property giant China Evergrande.
But there is plenty on the agenda this week that could disrupt this broadly positive tone.
Five of the ‘Magnificent Seven’ large U.S. tech stocks that have dominated U.S. markets in recent months report earnings this week, while the Fed concludes its rate setting meeting on Wednesday and always crucial non-farm payrolls come Friday.
“There is scope for U.S. rate cut expectations to bounce around this week,” said Jane Foley, head of FX strategy at Rabobank.
“Many economists warned last time around that (Federal Reserve Chair Jerome) Powell would push back against market expectations of rate cuts, and he chose not to, so we will have to see what he does.”
“That then feeds into non-farm payrolls, particularly wage inflation, as even if we have Powell not pushing back on expectations, if the wage inflation aspect of the payrolls is a little firmer, the market will read that as they need to be careful, and that March rate cuts are too early.”
U.S. yields dropped sharply in November and December last year, helping shares to rally, on expectations that Fed rate cuts could come as soon as March, though they have risen this year as traders pared back bets.
Economists mostly predict June for the first cut, but traders are pricing the odds on a March move at essentially a coin toss, according to CME Group’s FedWatch Tool.
Friday data showed continued moderation in U.S. consumer inflation, which added to the narrative of Fed rate cuts in the coming months but also suggested policymakers were under little pressure to rush.
The dollar and U.S. Treasury yields were in the middle of recent ranges on Monday, with the benchmark 10 year yield down nearly 6 basis points (bps) at 4.101%, though set for an increase of 25 bps in January. [US/]
Investors were also sensitive to geopolitical risks with oil rising after a Houthi missile attack caused a fire on a fuel tanker in the Red Sea and a drone attack killed three U.S. troops in Jordan.
In Asia, the main drag to stocks came from a Hong Kong court order to liquidate Evergrande, the poster child of China’s property meltdown.
Hong Kong’s Hang Seng trimmed gains on the news and closed up 0.78%, having earlier been up nearly 2% on the back of China’s securities regulator saying on Sunday it would fully suspend the lending of restricted shares.
Mainland Chinese blue chips had struggled to make headway early in the session, and eventually slumped 0.9%.
“People want to believe in what (Beijing is) doing, it’s just that they had a little bit of a hiccup in terms of communicating their policy intent at the beginning of the year,” said Damien Boey, chief macro strategist at Barrenjoey in Sydney.
The U.S. dollar index, which tracks the currency against six major peers, stuck to the middle of its range of the past two weeks at 103.55, little changed from Friday, though the euro dipped to its weakest in five months on the pound. [FRX/]
In commodity markets, Brent crude futures were flat at $83.51 a barrel, and gold added 0.53% to $2,029.1 an ounce. [GOL/] [O/R]
(Reporting by Kevin Buckland; Additional reporting by Stella Qiu; Editing by Kylie MacLellan and Mark Potter)
Monetary policy refers to the actions taken by a country's central bank to control the money supply and interest rates to achieve macroeconomic goals such as controlling inflation and stabilizing currency.
Economic growth is the increase in the production of goods and services in an economy over a period, usually measured by the rise in Gross Domestic Product (GDP).
Bond yields represent the return an investor can expect to earn from holding a bond until maturity. They are influenced by interest rates and the creditworthiness of the issuer.
Inflation is the rate at which the general level of prices for goods and services rises, eroding purchasing power. It is typically measured by the Consumer Price Index (CPI).
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