Global stock markets slip again as US interest rate cut hopes ebb

Global stock markets extended a New Year slide on Wednesday, while the dollar stayed strong, as market optimism about early US 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 per cent lower, following a 0.8 per cent 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 per cent and Asia Pacific shares outside Japan fell 1.3 per cent.

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

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 labour 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 per cent fall from record highs.

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

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

A climb in US 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 per cent on Tuesday.

It was last trading around 4 bps higher at 3.98 per cent.

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

The US dollar, which rose 0.8 per cent against major currencies overnight to a two-week high, held steady at 102.18.

Brent crude oil futures were 0.6 per cent lower at $75.41 a barrel as expectations of ample supply outweighed concerns about disruptions to Red Sea shipping routes for now.

Meanwhile the European shares fell on Wednesday as a rally from last year started to lose steam, with investors keeping an eye out for major factors during the day for cues on global monetary policy.

The pan-European STOXX 600 was down 0.3 per cent by 0923 GMT, after kicking off the New Year on a lacklustre note on Tuesday.

Basic resources was the worst-hit sector, down 1.7 per cent on weakness in most metals. Construction and material, financial services and technology also lost over 1 per cent each.

On the flip side, food and beverages jumped 1.1 per cent, led by a 3 per cent rise in Swiss packaged-food giant Nestle.

Healthcare also enjoyed strong gains, with Swiss drugmakers Novartis and Roche jumping nearly 4 per cent each.

The focus for the day is on a key US jobs report and minutes from the Federal Reserve’s December policy meeting. Meanwhile, regional data showed unemployment in Germany rose slightly in December.