Stocks toy with two-year highs in countdown to Fed
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[January 30, 2024] By
Amanda Cooper
LONDON (Reuters) - Global stocks traded at two-year highs and the dollar
edged up on Tuesday ahead of a Federal Reserve meeting, while Asian
equities took a knock from the court-ordered liquidation of Chinese
property giant Evergrande.
U.S. Treasuries benefited from a flurry of buying, pushing yields lower,
which in turn kept the dollar in a tight range, after the Treasury
Department said it would need to borrow less than it previously thought.
The MSCI All-World index was narrowly in positive territory at its
highest since January 2022.
But markets are edgy as tension escalated in the Middle East, keeping
oil above $80 a barrel, while investors pondered how the Evergrande
Group court order might impact China's fragile property market.
China stocks are already heading for a 4% drop this month, having hit
their lowest in four years, and Chinese government bond yields are at
two-decade lows, as investors hold out for the possibility of government
stimulus to bolster the world's second largest economy.
This week's other risk events for investors include the Fed and the Bank
of England's decisions on interest rates, monthly U.S. employment data
and multiple earnings, in particular from stock-market stars Apple,
Microsoft and Google parent Alphabet. U.S. futures were down 0.1%
"Markets now have a sense of paralysis. They obviously want to see what
the Fed is going to say this week ... and how much more is the door
going to be opened to rate cuts," Marc Ostwald, chief global economist
at ADM Investor Services, said.
"To my way of thinking, the key thing at the moment - and this is where
markets are also struggling - is we're looking at a rate-cut cycle, but
central banks and markets are looking at it in terms of a normal
economic cycle."
He said in the last 15 years, since the subprime crisis, all
rate-cutting cycles had been triggered by some form of financial
instability, rather than an economic cycle.
"We actually haven't had a normal rate-cutting cycle in response to a
change in demand and changes in the labour market for a very long time,
so that's why I partly think there is so much divergence in opinions,"
he said.
The Fed in December surprised markets with a dovish tilt, projecting 75
basis points of interest rate cuts in 2024, sparking a blistering
year-end risk rally.
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A woman climbs an escalator near residential buildings next to the
Evergrande City Plaza, after a court ordered the liquidation of
property developer China Evergrande Group, in Beijing, China January
29, 2024. REUTERS/Florence Lo
But a flurry of strong economic data, sticky inflation and caution
from central bankers have made markets reassess their expectations.
Markets expect a 47% chance of a Fed rate cut in March, the CME
FedWatch tool showed, down from 88% a month earlier. They currently
anticipate 134 bps of cuts in the year, compared with 160 bps of
easing a month ago.
HEARTY RISK APPETITE
Overnight, the S&P 500 logged another record high close and that
optimism fed into equity markets in Europe, where the benchmark
STOXX 600 was up 0.4%, having traded at two-year peaks.
The dollar edged up against a basket of currencies, rising 0.1% and
leaving the euro down 0.1% at $1.0818. But gains were tempered by a
rally in Treasury prices that pushed the yield on the benchmark
10-year note down 4 basis points to 4.055%.
The yuan, which is set for its worst monthly performance against the
dollar since August, was flat at 7.1879.
Investors are holding out for more measures from Beijing to defend
equity markets after a cut to bank reserves last week.
BlackRock Investment Institute said in a weekly note they hold a
neutral stance on Chinese assets.
"We see growth on a weaker trajectory and see only limited policy
stimulus from China," they said.
The oil price held firm, after the United States said it would take
"all necessary actions" to defend American forces after a drone
attack killed three U.S. troops in Jordan.
Brent crude futures were steady at $82.35 a barrel, as was U.S.
crude, at $76.80.
(Additional reporting by Ankure Banerjee; Editing by Edwina Gibbs,
Shri Navaratnam and Barbara Lewis)
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