LDN - Business

Global shares slip again as rate cut hopes ebb

[January 03, 2024] By Naomi Rovnick and Stella Qiu

LONDON, SYDNEY (Reuters) -Global stock markets extended a New Year slide on Wednesday, while the dollar stayed strong, as market optimism about early U.S. interest rate cuts ebbed and the latest escalation of hostilities in the Middle East weighed on sentiment.

MSCI's broad index of world equities was 0.2% lower, following a 0.8% fall on Tuesday, a weak start to 2024 that may herald the end of the blistering gains for stocks and bonds that began late last year.

Europe's STOXX 600 share index dipped 0.1% and Asia Pacific shares outside Japan fell 1.3%.

Caution was dominating markets ahead of the release of minutes from the U.S. Federal Reserve's December meeting, due at 1900 GMT on Wednesday as well as a slew of important U.S. data.

Fed officials in December predicted 75 basis points (bps) of rate cuts in 2024, driving money market bets for around double that amount of cuts that prompted a cross-market year-end rally.

"We had that whacking great rally at the end of last year when markets convinced themselves there would be a soft (economic) landing, cooling inflation and a rapid pivot to rate cuts," AJ Bell investment director Russ Mould said.

"But if you get an unexpected hard landing or an inflationary boom, you might get a slightly different script, so I guess people are now pausing for reflection."

Futures markets still see a 70% chance of the Fed starting to lower U.S. borrowing costs from their current 22-year high from March. But Reuters analysis of Fed policymakers' recent comments shows that, while many of them have noted improvements on inflation and some easing of wage pressures, most have not said monetary easing is urgent.

Important U.S. data this week should clarify the outlook, with ISM's manufacturing survey, due later on Wednesday, set to show whether the central bank has new recession signals to worry about. The market-moving U.S. non-farm payrolls report is due on Friday.

Market sentiment was also souring after tensions in the Middle East ratcheted up.

Israel on Tuesday killed Hamas deputy leader Saleh al-Arouri in Lebanon's capital Beirut, Lebanese and Palestinian security sources said, raising the risk of war in Gaza spreading well beyond the Palestinian enclave.

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Former manager of Japanese national baseball team Hideki Kuriyama rings a bell during a ceremony marking the end of trading in 2023 at the Tokyo Stock Exchange (TSE) in Tokyo, Japan December 29, 2023. REUTERS/Kim Kyung-Hoon

Denmark's Maersk and German rival Hapag-Lloyd said on Tuesday their container ships would continue to avoid the Red Sea after a series of attacks on vessels blamed on Houthi militants.

"Supply curves of commodities, inputs, intermediates, and final goods remain much more volatile than one would like. Furthermore, Western labor markets will remain structurally tight," Rabobank strategists said in a note to clients.

Futures markets tipped Wall Street's S&P 500 index to open slightly lower on Wednesday after Tuesday's 0.6% fall from record highs.

The tech-focused Nasdaq slid 1.6% on Tuesday, dragged lower by a nearly 3% drop in Apple to a seven-week low after Barclays downgraded its shares.

It was also set to drop 0.3% on Wednesday, futures trade indicated.

A climb in U.S. Treasury yields as the government debt securities sold off also continued on Wednesday. The benchmark 10-year yield, a barometer of expected long-term borrowing costs, briefly popped above 4% on Tuesday.

It was last trading around 4 bps higher at 3.98%.

Germany's 10-year Bund yield climbed 4 bps to 2.1%, rising for the fourth consecutive session.

The U.S. dollar, which rose 0.8% against major currencies overnight to a two-week high, held steady at 102.18.

Brent crude oil futures were 0.6% lower at $75.41 a barrel as expectations of ample supply outweighed concerns about disruptions to Red Sea shipping routes for now [O/R].

Spot gold was steady at $2,059 an ounce,

(Reporting by Naomi Rovnick in London and Stella Qiu in Sydney; Editing by Sam Holmes, Neil Fullick and Kevin Liffey.)

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