Global Stock Markets Slide as Dollar Remains Strong Amid Middle East Tensions
Global stock markets continued their downward trend on Wednesday, with the dollar maintaining its strength. Market optimism about early U.S. interest rate cuts has waned, and the latest escalation of hostilities in the Middle East has weighed on sentiment.
MSCI’s broad index of world equities fell 0.2 percent, following a 0.8 percent decline on Tuesday. This weak start to 2024 may signal the end of the impressive gains for stocks and bonds that began late last year.
Europe’s STOXX 600 share index dipped 0.1 percent, while Asia Pacific shares outside Japan fell 1.3 percent.
Investors are exercising caution ahead of the release of minutes from the U.S. Federal Reserve’s December meeting, scheduled for 1900 GMT on Wednesday, as well as a slew of important U.S. data.
In December, Fed officials predicted 75 basis points (bps) of rate cuts in 2024, leading to money market bets for around double that amount of cuts and prompting a year-end rally across markets.
However, AJ Bell investment director Russ Mould noted, “We had that significant rally at the end of last year when markets convinced themselves there would be a soft landing, cooling inflation, and a rapid pivot to rate cuts. 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 indicate a 70 percent chance of the Fed starting to lower U.S. borrowing costs from their current 22-year high starting in March. However, a Reuters analysis of recent comments from Fed policymakers shows that while many have acknowledged improvements in inflation and some easing of wage pressures, most have not deemed monetary easing urgent.
This week’s important U.S. data should provide further clarity on the outlook. The ISM’s manufacturing survey, set to be released later on Wednesday, will reveal whether the central bank has new recession signals to worry about. The market-moving U.S. non-farm payrolls report is due on Friday.
Market sentiment has also been dampened by escalating tensions in the Middle East. Denmark’s Maersk and German rival Hapag-Lloyd announced on Tuesday that their container ships would continue to avoid the Red Sea following a series of attacks on vessels attributed to Houthi gunmen.
Rabobank strategists noted in a client note, “Supply curves of commodities, inputs, intermediates, and final goods remain much more volatile than one would like. Furthermore, Western labor markets will remain structurally tight.”
Futures markets indicate a slightly lower opening for Wall Street’s S&P 500 index on Wednesday, following Tuesday’s 0.6 percent decline from record highs. The tech-focused Nasdaq dropped 1.6 percent on Tuesday, primarily driven down by a nearly 3 percent decrease in Apple shares after Barclays downgraded them. The Nasdaq is also expected to decline 0.3 percent on Wednesday.
U.S. Treasury yields continued to climb as government debt securities sold off. The benchmark 10-year yield briefly surpassed 4 percent on Tuesday and is currently trading around 3.98 percent, up 4 bps.
Germany’s 10-year Bund yield rose for the fourth consecutive session, climbing 4 bps to 2.1 percent.
The U.S. dollar, which saw a 0.8 percent increase against major currencies overnight to reach a two-week high, remained steady at 102.18.
Brent crude oil futures were down 0.6 percent at $75.41 a barrel as expectations of ample supply outweighed concerns about disruptions to Red Sea shipping routes for now.
Spot gold remained steady at $2,059 an ounce.
