Global shares lacklustre as rate cut hopes ebb

Global stock markets were lacklustre 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 (.MIWO00000PUS) was 0.1 per cent lower, following a 0.8 per cent fall on Tuesday, marking 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 (.STOXX) opened flat and Asia Pacific shares outside Japan fell 1.3 per cent (.MIAPJ0000PUS).

Caution crept in ahead of the release of minutes from the US Federal Reserve’s December meeting, due at 1900 GMT on Wednesday.

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.

Futures markets still see a 70 per cent chance of the Fed starting to lower US borrowing costs from their current 22-year high from March.

“The market has already executed a pivot on the Fed’s behalf,” strategists at Rabobank said in a research note, adding that the minutes “may still reinforce” the views of policymakers who are less committed to imminent cuts.

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 further, with ISM’s manufacturing survey, due later on Wednesday, set to signal whether the central bank has any new signs of an economic slowdown to worry about. The market-moving US nonfarm payrolls report is due on Friday.

Kyle Rodda, an analyst at Capital.com, said the combination of event risk and thin liquidity at the tail end of the holiday raises the prospect of exaggerated moves in markets and heightened volatility this week.

“All that’s required is a catalyst, which could come from the data flow in the coming days,” Rodda said.

Futures markets tipped Wall Street’s S&P 500 index to open flat later in the day after Tuesday’s 0.6 per cent fall in a retreat from record highs.

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

It was also set to flatline on Wednesday , judging by futures trade.

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 2 bps higher at 3.96 per cent.

Germany’s 10-year Bund yield climbed 3 bps to 2.089 per cent, rising for the fourth consecutive session.

Market sentiment was 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 (MAERSKb.CO) and German rival Hapag-Lloyd (HLAG.DE) said on Tuesday their container ships would continue to avoid the Red Sea after a series of attacks on vessels blamed on Houthi militants.

The US dollar, which climbed 0.8 per cent against an index of major currencies overnight to a two-week high, held steady at 102.1.

Brent crude oil futures, , were 0.2 per cent lower at $75.69 a barrel as expectations of ample supply outweighed concerns about disruptions to Red Sea shipping routes.

Spot gold rose 0.3 per cent to $2,065.39 an ounce.