Global Equities Set to End Winning Streak as Central Bank Rate Cut Bets Fade
Global equities are poised to break a nine-week winning streak as bets on aggressive central bank rate cuts are rolled back. This has led to a 0.3 percent dip in MSCI’s broadest index of global stocks, with a 2 percent decline expected for the week, marking its biggest weekly drop since late October. Europe’s Stoxx 600 index has also fallen by 0.9 percent. In addition, government bond yields in the eurozone and the United States have risen sharply as prices of interest rate-sensitive debt securities have fallen.
The caution in the market is due to eurozone inflation data, which showed a year-on-year increase of 2.9 percent in December, up from 2.4 percent in November. This has eased pressure on the European Central Bank (ECB) to cut borrowing costs from record highs. Furthermore, the upcoming U.S. monthly non-farm payrolls figures could provide clues about the Federal Reserve’s next moves. The Fed is expected to cut interest rates from a 22-year high in 2024 but closely monitors employment data for signs of resurgent inflationary pressures.
The market sentiment reflects a hangover after the exuberance of December, with investors realizing that the optimistic upturn may have been too much, too soon. Traders now see a 60 percent chance of the Fed starting to cut its funds rate in March, down from 71 percent a week ago. The question remains whether the initial pricing of six rate cuts was accurate or excessive, depending on the data.
As a result of these developments, government bond yields have risen. The 10-year Treasury yield has climbed 5 basis points to 4.034 percent, while Germany’s 10-year bund yield has risen by 7 basis points to 2.17 percent. The U.S. dollar index has also strengthened, adding 0.3 percent to 102.72.
In Asia, Japan’s Nikkei has bucked the downtrend for global equities, rising by 0.3 percent as exporters benefit from a weaker yen. However, the recent earthquake on Japan’s coast has eliminated the possibility of the Bank of Japan tightening monetary policy this month.
Gold prices have slipped by 0.3 percent to $2,037 per ounce, while oil markets remain volatile due to expectations of weak demand from China and concerns about supply disruptions in the Red Sea. Brent crude futures are currently up 0.9 percent at $78.28 per barrel.
Overall, global markets are experiencing a shift in sentiment as bets on central bank rate cuts are scaled back. Investors are closely monitoring economic data to determine the future direction of monetary policy.
