Nervous stocks slide on upcoming data and Red Sea tensions

  • Dollar up 0.2%, S&P 500 futures -0.3%
  • Bonds see profit-taking, gold falls after crossing $2,100
  • Bets on US interest rate cuts are tested against payrolls
  • Red Sea Shipping Attacked, Oil Still Fighting

LONDON, Dec 4 (Portal) – Wall Street stock futures fell on Monday as investors grew cautious about a series of economic data releases this week that boosted market bets on interest rate cuts by major central banks and the state of the global economy next year will be put to the test.

At 7:22 a.m. ET, the Dow e-minis 1YMcv1 fell 0.3%, the S&P 500 e-minis EScv1 fell 0.4% and the Nasdaq 100 e-minis NQcv1 fell 0.5%.

Attacks on merchant ships in the Red Sea on Sunday could reignite investor concerns about an expansion of the war between Israel and Hamas, potentially complicating prospects for a rally that saw U.S. stocks hit a new year-end closing high last week.

“So far the situation seems to be quite limited. But the implications and risks involved cannot be underestimated – the risks to oil if Iran becomes involved, and of course that could have a significant impact on supply chains, inflation and financial markets in general,” said Paul Watters, head of European Credit research at S&P Global Ratings.

Also in focus for analysts and traders was Friday’s U.S. jobs report for November, which needs to be solid enough to support the economic soft landing scenario, but not so strong that it threatens the possibility of easing. According to average forecasts, the number of employed people will increase by 180,000, which corresponds to a stable unemployment rate of 3.9%.

Wage growth is still above the Fed’s target, said Bruno Schneller, managing director of INVICO Asset Management. If upcoming data matches expectations, it could mean rate hikes end this year and transition to rate cuts in 2024.

“With the U.S. presidential election approaching in 2024, the Fed will likely avoid actions that could be perceived as favoring one candidate, so we can expect no major surprises and a continued data-dependent approach from the Fed,” Schneller said.

Futures now imply a 60% chance the Fed will ease rates as early as March, up from 21% a week ago, and are pricing in cuts of about 135 basis points (bps) for all of 2024.

The turnaround in government bonds has been nothing short of astonishing, with two-year Treasury yields falling 41 basis points in just one week, the best performance since the mini-crisis in the U.S. banking sector in March.

So it was no surprise that profit-taking occurred on Monday, pushing the 10-year yield to 4.25%, but still well below October’s peak of 5.02%.

BULLISH FOR EM

The fall in Treasury yields in turn pulled the rug out from under the dollar, particularly against the yen, where it slipped 1.8% last week and was last at 146.62.

Speculation about a possible reversal of the Bank of Japan’s ultra-loose policy has added pressure to yen carry trades and could send the Japanese currency back to its July highs around 138.00. The dollar rose 0.2% against a basket of currencies = USD.

The euro fell 0.1% to $1.0868. It has also risen recently, but experienced a reversal last week as surprisingly weak inflation data led markets to price in a European Central Bank interest rate cut in March.

The always aggressive Bundesbank President Joachim Nagel defended himself against the pigeons in an interview at the weekend. However, with inflation falling so quickly, markets expect the ECB to ease rates to prevent real interest rates from rising.

ECB President Christine Lagarde will have the opportunity to speak in a speech and question-and-answer session later on Monday.

The drop in yields was a boon for zero-yielding gold, which hit a record $2,111.39 an ounce before falling to $2,066.73.50 an ounce by 1232 GMT.

Oil prices fell amid doubts that OPEC+ will be able to maintain planned production cuts. This is underscored by US oil production reaching a record high of over 13 million barrels per day and the number of drilling rigs still rising.

Attacks on shipping in the Red Sea provided only temporary support and Brent fell 43 cents to $78.45 a barrel, while U.S. crude fell 41 cents to $73.66 at 1233 GMT.

Reporting by Nell Mackenzie and Dhara Ranasinghe; Editing by Amanda Cooper, Alison Williams and Christina Fincher

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Senior correspondent for the London markets team, covering European government bond markets and major macro and financial topics.


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