LDN - Business

Stocks rally fades as traders puzzle over US economy

[June 21, 2024] By Naomi Rovnick and Dhara Ranasinghe

LONDON (Reuters) -Global stocks traded cautiously on Friday as the dollar hit multi-week highs and markets awaited U.S. business surveys for clues to determine whether the world's largest economy remains strong enough to withstand high interest rates.

MSCI's broad index of global stocks was down around 0.25% on the day, nudging off record highs hit a day earlier but still up around 2% for the month so far.

Europe's STOXX share index was down around 0.8%, following data that showed euro zone business growth slowed sharply this month. U.S. stock futures slipped and implied Wall Street's S&P 500 would also drift down in early New York dealings.

The mood was indecisive ahead of the release of S&P Global's U.S. purchasing manager indices, viewed as real-time snapshots of business confidence and economic activity, later in the day.

Economists polled by Reuters expect this month's indices to produce readings above the level of 50, which show activity is expanding, but a slight drop since last month.

A robust U.S. economy has propelled Wall Street stocks to record levels and dissuaded the Federal Reserve from cutting interest rates from its 23-year high of 5.25% to 5.5%.

Markets are currently clinging to a narrative that the economy and inflation will decelerate just enough for the Fed to ease financial conditions gradually.

But that ignores risks such as the lagged effects of tight monetary policy causing a hard slowdown, or further economic growth keeping rates high for longer, said Russell Investments global head of investment strategy Andrew Pease.

"I'd be concerned about higher (market) volatility in coming months as the market oscillates between seeing the soft landing and worrying that maybe it's not going to happen," he said.

INTERVENTION ZONE

Meanwhile, relentless dollar strength pushed the Japanese yen towards the intervention zone.

The yen dropped to around 159.12 per dollar, its weakest levels since late April when Japanese authorities intervened to stem the currency's rapid decline.

"The price action highlights that the impact of intervention by Japan to support the yen...has almost fully reversed," said MUFG currency strategist Lee Hardman.

"The yen has resumed its weakening trend even as yield spreads have been moving in its favor in recent months."

Data showed earlier on Friday that Japan's demand-led inflation slowed in May.

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Examples of Japanese yen banknotes are displayed at a factory of the National Printing Bureau producing Bank of Japan notes at a media event about a new series of banknotes scheduled to be introduced in 2024, in Tokyo, Japan, November 21, 2022. REUTERS/Kim Kyung-Hoon/ File Photo

That complicated the outlook for how quickly the Bank of Japan might move towards rate hikes after ending negative rates in March in a landmark signal the nation might have ended a long era of deflation and demographic decline.

BoJ deputy governor Shinichi Uchida said on Friday the central bank was willing to raise rates if the economy and prices move in line with its forecasts, but signs of weakness remained.

The dollar also benefited from a growing divergence between Fed policy and that of central banks in Europe. On Thursday the Swiss National Bank cut rates for a second time, while the Bank of England opened the door to rate cuts in August or September.

Sterling, the Swiss franc and the euro also weakened against the dollar on Friday.

MSCI's broadest index of Asia-Pacific shares outside Japan fell 0.6% on Friday, dragged lower by a pull-back in technology shares in a repeat of patterns on Wall Street in the previous session.

In debt markets, U.S. Treasuries were set to end the week on the back foot as Fed rate cut doubts lowered the appeal of the fixed interest-paying securities.

Two-year Treasury yields were last down around 2 basis points (bps) at 4.71%, but set for a weekly rise of 3 bps. Ten-year yields are up 2 bps for the week, trading at around 4.23%. Bond yields rise as prices fall.

In Europe, bond yields fell following weaker-than-expected business activity data, with Germany's 10-year Bund yield down 5 bps at 2.37%.

HCOB's preliminary composite Purchasing Managers' Index, compiled by S&P Global, sank to 50.8 this month from May's 52.2.

UK 10-year gilt yields fell 2 bps to 4.04%, reflecting hopes of BoE rate cuts and as predictions of the opposition Labor Party winning next month's UK election drew investors back to British markets.

Brent crude futures dipped 0.1% to $85.61 a barrel after hitting seven-week highs earlier in the week.

Gold was a touch lower at $2,363 per ounce.

(Reporting by Naomi Rovnick, Dhara Ranasinghe and Stella Qiu; Editing by Jan Harvey and Shinjini Ganguli)

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