Global markets calm before US inflation data, forex slips

Japanese stocks hit a 34-year high on Wednesday while global equities, the dollar and bonds held steady before US inflation data on Thursday.

Bitcoin stabilised after spiking when an unauthorised post from the US Securities and Exchange Commission’s X account said it had approved bitcoin exchange-traded funds.

Japan’s Nikkei - which had its best year for a decade in 2023 - climbed 2 per cent to break above 34,000 for the first time since 1990. Exporters led the charge, helped by a softening yen after data showed Japanese real wages shrank for a 20th month in November.

“Japan is really interesting,” said Duncan MacInnes, an investment director at British firm Ruffer. “The problems have been corporate governance, which is definitely improving, (and) it has tended to be a very cyclical market, so it gets hit especially hard when the market turns down.”

The pan-European Stoxx 600 index was flat in early trading, while Britain’s FTSE 100 was 0.19 per cent lower and Germany’s DAX index was up 0.2 per cent.

Futures for the US S&P 500 were up 0.19 per cent after the index dipped 0.15 per cent on Tuesday, as investors waited for the inflation figures and for the start of company earnings season. Nasdaq 100 futures were 0.37 per cent higher.

US and European markets surged at the end of 2023 as inflation cooled quicker than expected and central banks struck a softer tone, encouraging investors to bet on big rate cuts this year.

The optimism about falling borrowing costs has waned slightly in January and the S&P 500 is down around 0.3 per cent so far after rallying 24 per cent last year.

The index which tracks the US dollar was flat. The US currency has risen around 2 per cent since hitting a five-month low in late December.

Bitcoin was last down 1.3 per cent at $45,540 after spiking as high as $47,897 on the false reports of ETF approvals. The SEC said it had not yet approved a spot bitcoin ETF and that someone had accessed its X social media account without authorisation.

INFLATION IN FOCUS: The crucial event for markets this week is US consumer price index inflation data today (Thursday), which could cause traders to adjust their bets on rate cuts.

Economists polled by Reuters see year-on-year inflation at 3.2 per cent in December, up from 3.1 per cent in December. But they think core inflation likely fell to 3.8 per cent, its lowest since mid-2021, from 4 per cent.

Interest rate futures are pricing around 140 basis points of US rate cuts this year. The probability of a move in March has been pared somewhat to a still-high 68 per cent.

“Market pricing... has gotten a little bit ahead of itself,” Jeff Klingelhofer, co-head of investments and managing director at Thornburg Investment Management, told journalists on an outlook call on Wednesday.

“If you look at history - five (25 bp) cuts is very consistent with a recession, but markets aren’t pricing in a recession.”

Benchmark 10-year Treasury yields were last down 3 basis points in European trading on Wednesday at 3.991 per cent. They move inversely to prices and have risen this year after plunging in November and December.

Geopolitical tensions were also on the radar as disruptions in the Red Sea and a production outage in Libya raised oil prices, and an election looms in Taiwan. Brent crude oil futures rose 1.9 per cent on Tuesday and were up 0.4 per cent to $77.91 a barrel early on Wednesday. The euro was up 0.14 per cent at $1.095, while the dollar was 0.3 per cent higher against the yen.

Meanwhile emerging markets stocks hit near one-month lows on Wednesday, led by declines in broader Asian shares, while currencies slipped as investors awaited US inflation data for clarity on the timing of interest rate cuts.

The MSCI’s gauge of emerging market stocks was down 0.4 per cent at 0946 GMT, hitting its lowest levels since Dec. 14, while a basket of currencies slipped 0.1 per cent against a steady US dollar.

Across Asia, both Shanghai’s Composite index and China’s blue-chip shares dropped 0.5 per cent each, while Hong Kong’s Hang Seng index fell 0.6 per cent. Taiwan shares declined 0.4 per cent.

The launch of a Chinese satellite that flew over Taiwan, prompting an erroneous air raid alert, sparked a political storm on the island on Wednesday about China’s motives only days out from presidential elections.

Assets across emerging markets started the first week of 2024 on a sour note as investors dialled back expectations of early rate cuts.

Turkey’s lira touched fresh lows of 29.9765, running closer to the 30 per dollar mark.

On the data front, Turkey’s domestic unemployment rate rose in November, while industrial output dropped for the same period.

Egypt’s sovereign dollar bonds rallied by more than 1.3 cents on Wednesday, Tradeweb data showed, after US Treasury Secretary Janet Yellen pledged US support for its economy and reforms.