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Marketmind: Global disinflation cheer as records break

[December 20, 2023] A look at the day ahead in U.S. and global markets from Mike Dolan

Wall Street is zooming into year-end holidays cracking new records as global disinflation tailwinds lifted bonds and stocks across the world, potentially tempting switches in 2024.

As the S&P500 crept to within 1% of all-time highs on Tuesday and tracking its best quarter since 2020, the Nasdaq 100 - up more than 50% this year - clocked a new record and the vanguard of megacap tech giants has now doubled in 2023.

With 2024 rate cut euphoria filling the pre-Christmas air, 10-year U.S. Treasury yields fell to their lowest since July at 3.8830% early on Wednesday - spurred in large part by a surge in British markets on a surprisingly sharp drop in UK inflation last month.

Ten-year gilt yields plumbed their lowest since April at 3.51% and the FTSE100 jumped 1% on news annual UK consumer price inflation dropped to 3.9% from October's 4.6% - below all forecasts and the Bank of England's expectation that CPI would be only just below 4.5% at the end of the year.

Knocking sterling back in the process, UK money markets shifted to price the first BoE rate cut as soon as March and two quarter-point cuts by midyear.

With U.S. traders eyeing a 20-year Treasury auction later in the day, the bond boom filtered around the globe - with 10-year German bund yields sinking below 2% for the first time since March. Italian equivalents plunged to their lowest of the year, with the premium over Germany shrinking to its narrowest since June.

Even though some central banks continued to push back against what they see as excessive rate cut bets for next year, the demand for long duration bonds on the turn of the interest rate cycle generally was unabated.

Chicago Federal Reserve boss Austan Goolsbee said markets had got "a little ahead of themselves" but inflation progress would dictate the pace of Fed easing from here.

Bundesbank chief and hawkish European Central Bank policymaker Joachim Nagel said rates most likely had peaked but added: ""I would say to everyone who is speculating on an imminent interest rate cut: be careful"

However, other Fed officials insisted policy plans should stay focused and not get overly distracted with what was happening on markets.

"One of the things I've learned is I don't control markets and so they're going to do what they're going to do," Richmond Fed President Thomas Barkin said on Tuesday.

Even though MSCI's all-country stock index powered to its best levels since March last year, U.S. stock futures took a bit of a breather and stepped back from latest peaks early on Wednesday.

Cooling the mood was a profit miss from global delivery firm FedEx, whose shares dropped almost 10% after the bell on Tuesday after it cut full-year revenue forecasts as its largest Express business saw demand from the U.S. Postal Service drop.

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People enjoy warm weather in front of the city of London financial district in London, Britain, May 18, 2022. REUTERS/Hannah McKay/File Photo

U.S. consumer confidence readings for December will be watched closely later today, but housing market readouts this week have been upbeat.

Gains against sterling aside, the dollar was mixed. Crude oil prices were a touch higher, but still negative year-on-year and U.S. naval force protection for Red Sea shipping helped ease jitters about threats to supply chains there.

Overseas, the worrying funk in China's economy seemed to be spreading as Japan's exports fell last month for the first time in three months dragged down by China-bound chip shipments.

But stocks and bonds in Tokyo continued to be buoyed by this week's decision by the Bank of Japan to stand pat on its super-easy monetary policy.

Toshiba was delisted on Wednesday after 74 years on the Tokyo exchange, following a decade of upheaval and scandal that ushered in a buyout and an uncertain future.

China's markets, as so often this year, underperformed yet again and lost another 1% on Tuesday to hit their lowest in almost five years. Freezing weather there added to chill.

A Bank of America Asia fund manager survey showed more than 60% of investors would rather stick to a wait-and-watch approach or look for opportunities elsewhere than be exposed to China equities. "Investor interest towards risk assets in China is shockingly low," the report said.

In politics, next year's U.S. election speculation hovered into view again after Colorado's top court ruled former President Donald Trump was disqualified from serving as president and cannot appear on the primary ballot because of his role in the 2021 attack on the U.S. Capitol by his supporters.

Key developments that should provide more direction to U.S. markets later on Wednesday:

-U.S. Dec consumer confidence, Nov existing home sales, Q3 current account

-Chicago Federal Reserve President Austan Goolsbee; European Central Bank chief economist Philip Lane speaks; Bank of Canada meeting minutes.

-U.S. treasury auctions 20-year bonds

-European Union finance ministers hold teleconference to clinch deal on EU fiscal and debt rules

-U.S. corporate earnings: Micron Technology, General Mills

(Editing by Bernadette Baum)

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