LDN - Business

Stocks strong, yields dip, this week's excitement still to come

[January 29, 2024] By Kevin Buckland and Alun John

TOKYO/LONDON (Reuters) - European shares were at their highest since Jan 2022 and bond yields dipped on Monday, the start of a packed week with big corporate earnings, European inflation data, Federal Reserve and Bank of England meetings and U.S. jobs numbers incoming.

Europe's broad STOXX 600 index nudged slightly higher helped by strength across the energy sector on renewed tensions in the Middle East, reaching fresh 2-year highs after its biggest weekly gain in over two months last week.

U.S. share futures were also steady, suggesting no immediate disruption 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, allowing the Federal Reserve to start cutting interest rates.

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 Federal Reserve rate cuts could come as soon as March, though they have risen this year as trades pared back bets.

Economists mostly predict June for the first cut, but traders are pricing the risk of a March move at essentially a coin toss, according to CME Group's FedWatch Tool.

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A passerby walks past an electric monitor displaying recent movements of various stock prices outside a bank in Tokyo, Japan, March 22, 2023. REUTERS/Issei Kato/File Photo

Friday data showed continued moderation in U.S. consumer inflation, which added to the narrative for Fed rate cuts in coming months but also suggested policy makers had 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 bps at 4.101%..

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%, off the 1.9% gain made after China's securities regulator said on Sunday it would fully suspend the lending of restricted shares.

Mainland China 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.

In energy markets, Brent crude futures shed 15 cents, or 0.2%, to $83.40 a barrel.

Haven gold added 0.5% to $2,028.9 an ounce.

(Reporting by Kevin Buckland; Additional reporting by Stella Qiu; Editing by Raju Gopalakrishnan, Sam Holmes and Kylie MacLellan)

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