Equity rally fizzes as Fed caution dominates: Markets Wrap

(Bloomberg) — European stocks opened lower and US index futures were muted as investors debated whether inflation had eased enough to encourage the Federal Reserve to ease monetary tightening.

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The Stoxx Europe 600 Index fell for the second time in three days. Contracts on the S&P 500 and Nasdaq 100 index were little changed following Tuesday’s rally in US stocks following a fifth month of decline in consumer price growth. Treasuries rose for the second day, while the dollar fell. Gilts led European bonds higher after UK inflation slowed more than expected in November.

While a lower-than-expected figure for the US consumer price index sparked a rally for stocks and bonds, earnings were dampened by warnings that the Fed could remain determined to raise rates. After a 50 basis point hike in the Fed’s policy rate was firmly priced in later Wednesday, traders remained keen on signals policymakers could give about when the hikes will end and whether a rate cut is possible next year.

“The question is, with inflation still at generational levels, will the Fed step through that door?” Stephen Innes, managing partner at SPI Asset Management, wrote in a note. “Following an initially buoyant response, the relatively subdued response for equities is likely due to pre-risk event positioning, the prevailing bearish growth sentiment, technical factors and the devil in the details.”

The European equity benchmark fell after its biggest one-day rise since Nov. 10, as caution reigned over Fed announcements later in the day, as well as expectations for rate hikes from the European Central Bank and Bank of England on Thursday.

Medium-term treasuries, referred to as the belly of the yield curve, posted the biggest gains on Wednesday. The five-year rate lost 5 basis points, while its seven-year counterpart was 4 basis points lower. Traders are betting that after today’s move, the Fed will opt for an additional 50 basis point hikes, then a similar cut by the end of next year.

In the UK, government bonds rose across the curve, with two-year yields falling by 3 basis points. Inflation in the country fell from its highest level in 41 years in November, raising the likelihood that the worst of the cost of living is behind us.

The dollar was down 0.2%. The New Zealand dollar fell in a decline that accelerated after the government warned a recession was likely next year.

Stocks in Hong Kong, Japan and Australia made strides, pushing the MSCI Asia Pacific index to a three-month high and closing 19% above its October low.

Jitters about Fed policy echoed in the oil market, where West Texas Intermediate futures halted a two-day rally. Traders also weighed the demand outlook amid a rapid easing of Covid restrictions in China against the effect of new cases on economic activity in the country.

Main events this week:

  • FOMC rate decision and Fed Chair press conference, Wednesday

  • China medium-term loans, real estate investment, retail sales, industrial production, jobless surveyed, Thursday

  • ECB interest rate decision and briefing from ECB President Lagarde, Thursday

  • Tariff decisions for UK BOE, Mexico, Norway, Philippines, Switzerland, Taiwan, Thursday

  • US Cross Border Investments, Business Inventories, Imperial Manufacturing, Retail Sales, First Jobless Claims, Industrial Production, Thursday

  • Eurozone S&P Global PMI, CPI, Friday

Some of the major moves in markets:

Shares

  • The Stoxx Europe 600 was down 0.5% from 8:30am London time

  • Futures on the S&P 500 changed little

  • Futures on the Nasdaq 100 were little changed

  • Futures on the Dow Jones Industrial Average had changed little

  • The MSCI Asia Pacific Index rose 0.8%

  • The MSCI Emerging Markets Index rose 1.1%

Currencies

  • The Bloomberg Dollar Spot Index fell 0.2%

  • The euro was little changed at $1.0638

  • The Japanese yen rose 0.2% to 135.38 per dollar

  • The offshore yuan rose 0.3% to 6.9411 per dollar

  • The British pound was little changed at $1.2372

Cryptocurrencies

  • Bitcoin rose 0.2% to $17,803.08

  • Ether rose 0.2% to $1,322.91

Bonds

  • 10-year Treasury yields fell three basis points to 3.47%

  • The German 10-year yield was little changed at 1.92%

  • UK 10-year yields fell by three basis points to 3.27%

Raw materials

  • Brent oil fell 0.2% to $80.50 a barrel

  • Spot gold fell 0.1% to $1,808.67 an ounce

This story was created with the help of Bloomberg Automation.

–With assistance from Richard Henderson and Georgina Mckay.

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