Shares lose steam as doubts cloud interest rate optimism

[November 07, 2023]  By Tom Wilson

LONDON (Reuters) - World shares lost steam on Tuesday as investor enthusiasm about a peak in global interest rates faded, while the dollar made gains as appetite for riskier currencies calmed.

The MSCI world equity index, which tracks shares in 47 countries, fell 0.4%. The broad Euro STOXX 600 declined 0.4%, dragged down by energy stocks which fell 1.5%, tracking a drop in crude oil prices.

U.S. Treasuries were broadly steady, having unwound some of the rally that followed the Federal Reserve's decision to leave interest rates on hold last week.

Ten-year yields hovered at 4.641% - about 10 basis points (bps) above where they closed on Friday, after their biggest weekly drop since March, but well below the 5% mark touched in late October.

Wall Street was set for losses, too, with S&P 500 futures falling 0.3%.

The Nasdaq logged a seventh straight session of gains on Monday, capping its longest streak since January, though its gain was a slender 0.3% as the rally loses momentum.

"There was quite a bit of euphoria at the end of last week on the belief that the Fed is done, the jobs market is slowing, that the U.S. economy is going to experience a soft landing," said Michael Hewson, chief market analyst at CMC Markets UK.

"People have started to become a bit more clear eyed. There is the risk that the Fed could rise again."

A trio of Fed officials are due to speak later in the day, with investors watching for clues on the central bank's next moves.

Fed funds futures imply only a slim chance of another hike, but bets on rate cuts next year were trimmed.

"It continues to be a tug-of-war between markets and the Fed, as the latter has suggested that higher long-end yields would ... do the job of policy tightening for them," said Nicholas Chia, macro strategist at Standard Chartered.

"Markets probably fret that lower yields would force the Fed to re-think about an extended pause."

Earlier, MSCI's broadest index of Asia-Pacific shares outside Japan slipped 1.2%, snapping three straight days of gains.

A man works at the Tokyo Stock Exchange after market opens in Tokyo, Japan October 2, 2020. REUTERS/Kim Kyung-Hoon/File Photo

In China, data showed imports unexpectedly grew in October, while exports contracted faster than expected, in a mixed set of indicators that showed the recovery in the world's second-largest economy remains uneven.

Hong Kong's Hang Seng fell 1.7%, while mainland China blue chips fell 0.4%.

DOLLAR UP

Against a basket of currencies, the dollar index rose 0.4% to 105.68, adding to gains of 0.2% on Monday and moving away from its near two-month low of 104.84 touched on Monday.

The index fell 1.3% last week, its steepest decline since mid-July, part of the wider risk-on mood in markets.

Currency traders were also focused on the Australian dollar, which fell about 1.2% to $0.641 after the Reserve Bank of Australia announced a 25 basis point hike, as expected, taking the cash rate to a 12-year high of 4.35%.

But the central bank softened its language on the necessity of any further action.

The stronger dollar has pushed the Japanese yen back to the weak side of 150 to the dollar, and it hovered at 150.5 at the start of the European session.

The euro slipped 0.4% to $1.067, down from an eight-week peak of $1.0756 hit on Monday.

In commodity markets, oil slipped 1.4% with Brent crude futures at $84.02 a barrel, erasing most of Monday's gains as the mixed data from China and winter demand worries offset the impact of Saudi Arabia and Russia extending output cuts. [O/R]

(Reporting by Tom Wilson in London and Tom Westbrook in Singapore; Additional reporting by Ankur Banerjee in Singapore; Editing by Lincoln Feast, Kim Coghill and Christina Fincher)

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