Global shares dip, while dollar steadies; eyes on BOJ

[December 18, 2023]  By Nell Mackenzie and Wayne Cole

LONDON/SYDNEY (Reuters) -World stocks slipped on Monday, while the dollar steadied ahead of a week including a Bank of Japan policy announcement and a key reading on U.S. inflation.

Iranian-backed Houthi militants have stepped up attacks on vessels in the Red Sea, which on Monday pushed up shares in big shipping companies, particularly in Europe, on the view that they may push up their rates in response, while crude oil eased modestly.

MSCI's broadest index of world shares dipped 0.1%. European shares opened on a slide led by a decline in real estate stocks but then remained flat after shipping stocks rose across European exchanges.

The pan-European stock index traded largely flat by 1021 GMT, after its fifth straight weekly gain on Friday, its longest streak since April.

By 1023 GMT, D'Amico International Shipping B7C.MI, Hapag Lloyd HLAG.DE and Hafnia HAFNI.OL gained between 4 and 2%. Frankfurt-listed shares in Scorpio Tankers S0QA.F and Nordic American Tankers NAT.N rose 5 and 8%, respectively.

Oil prices fell towards last week's five-month low amid doubts all OPEC+ producers will stick with caps on output. [O/R]

Lower exports from Russia and the attacks in the Red Sea seemed priced in to crude oil as Brent fell 64 cents to $75.93 a barrel, while U.S. crude fell 61 cents to $70.82 by 1030 GMT.

Florian Ielpo, head of macro at Lombard Odier Investment Managers, said that in recent days he had seen less market reaction to macro economic data and more moves in stock and bond markets after remarks made by central bank policy makers.

"We will see this week, genuinely, how the market digests a Fed pivot," said Ielpo who noted that so far, stocks had risen and credit spreads widened, with a growing difference between corporate and sovereign bond yields with the same maturity.

The Bank of Japan's policy decision on Tuesday will likely be the main event in Asia this week. April was favoured by 17 of 28 economists as the kick-off for negative rates to be scrapped, making the BOJ one of the few central banks in the world actually tightening.

"Since the last meeting in October, 10-year JGB yields have fallen and the yen has appreciated, giving the BOJ little incentive to revise policy at this stage," said Barclays economist Christian Keller.

None of the analysts polled by Reuters expected a definitive move at this week's meeting, but policymakers might start laying the groundwork for an eventual shift.

South Korea's main index closed 0.3% higher, showing no obvious reaction to reports North Korea had fired a ballistic missile off its east coast.

Signage for the London Stock Exchange Group is seen outside of offices in Canary Wharf in London, Britain, August 3, 2023. REUTERS/Toby Melville/File Photo

S&P 500 futures inched up 0.3%, while Nasdaq futures added 0.2%.

In the United States, a reading on core personal consumption expenditure (PCE) index due on Friday is forecast by analysts to rise 0.2% in November with the annual inflation rate slowing to its lowest since mid-2021 at 3.4%, according to economists polled by Reuters.

Analysts suspect the balance of risk is tilted to the downside and a rise of 0.1% for the month would see the six-month annualised pace of inflation slow to just 2.1% and almost at the Federal Reserve's target of 2%.

Markets reckon the slowdown in inflation means the Fed will have to ease policy just to stop real rates from rising, and are wagering on early and aggressive action.

New York Fed President John Williams did try to temper some of these expectations on Friday by saying there was no talk of easing by policy makers, but markets shrugged off his remarks.

MARCH MADNESS

Two-year Treasury yields ticked up only slightly in response, around 4.41%, at its lowest since May.

Yields on 10-year notes stood at 3.90%, having dived 33 basis points last week in the biggest weekly fall since early 2020.

Fed fund futures imply a 74% chance of a rate cut as early as March, while May has 39 basis points (bp) of easing priced in. The market also implies at least 140 basis points of cuts for all of 2024.

Analysts at Goldman Sachs said a client note they expect five cuts in 2024 and three more cuts in 2025.

The market's dovish outlook for U.S. rates saw the dollar slip 0.2% against a basket of currencies last week, though the Fed is hardly alone in the rate-cutting stakes.

Markets imply around 150 basis points of easing by the European Central Bank next year, and 113 basis points of cuts from the Bank of England.

That outlook restrained the euro at $1.0921, having pulled back from a top of $1.1004 on Friday. The dollar was looking more vulnerable against the yen at 142.42, having slid 1.9% last week.

The drop in the dollar and yields should be positive for gold at $2,022 an ounce, though that was short of its recent all-time peak of $2,135.40. [GOL/]

(Reporting by Nell Mackenzie and Wayne Cole; Editing by Amanda Cooper, Christopher Cushing, Jacqueline Wong and Hugh Lawson)

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