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European Stock Futures Fall on Fed Rate-Cut Odds: Markets Wrap

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(Bloomberg) — European stocks were set to follow New York and Asia lower as traders pushed back expectations of interest rate cuts by the Federal Reserve to later in 2024 following strong US economic activity data.

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Euro Stoxx 50 futures fell 0.5%. Contracts for US shares inched higher after the S&P 500 Index declined the most this month, while Treasury yields climbed and the dollar strengthened.

In Asia, a gauge of regional equities was on pace for its worst day since May 8, extending its weekly losses, as shares from Hong Kong to mainland China, Japan and Australia fell. An index of Chinese shares in Hong Kong was on track for its worst week since January.

Emerging Asian currencies, including South Korea’s won, Malaysia’s ringgit and the Thai baht, fell on the back of a stronger dollar. The greenback extended its gains against Group of 10 peers to a fifth day, the longest streak since April.

Swaps now fully price the Fed’s first full quarter-point rate cut in December, versus November a day earlier. Growth in activity at service providers was the fastest in a year and manufacturing output expanded at a quicker pace. Such resilience is making it difficult for inflation to cool, thus the Fed is likely to keep rates higher for longer.

“It appears that markets are in the ‘good (economic) news is bad market news’ mode as they fret ‘higher for longer’ Fed,” said Vishnu Varathan, Asia head of economics and strategy at Mizuho Bank Ltd. “The weight of higher US yields and a stronger US dollar appear to be bearing down on EM Asian stocks and FX.”

A rally in global stocks faltered this week as investors became less certain on the path of US interest-rate cuts, with Fed policy makers seeking more evidence of easing inflation. A pause in Chinese stocks’ gains this week and strength in the US dollar also weighed on sentiment.

Investors will be watching the shift to the adoption of a new faster settlement cycle in the US, which the country’s securities regulator warned may trigger some failed trades initially, after Wall Street returns from Monday’s holiday. The long weekend in America might also reduce liquidity in some markets.

In Japan, inflation eased for a second month as investors continued to weigh whether the Bank of Japan has capacity to raise interest rates further this year. The yield on 10-year Japanese government bonds topped 1% this week as markets almost fully price a 10 basis point hike at the July meeting, according to data compiled by Bloomberg. The yen is trading around 157 per dollar.

The cooling in prices, however, won’t “deter financial markets from speculating on further Bank of Japan policy tightening,” said Kristina Clifton, a senior economist at Commonwealth Bank of Australia in Sydney. “At this stage, we expect the BOJ to wait until around October before increasing interest rates again,” which could place further pressure on the yen, she added.

Alibaba Group Holding Ltd. has raised $4.5 billion from a convertible bond sale, in one of the largest such offerings in recent years, according to people familiar with the matter. In Japan, Kobayashi Pharmaceutical Co. shares surged after Oasis Management CIO Seth Fischer said there’s a potential for the stock to jump 70% if the Japanese drugmaker engages with the activist fund.

Adani Group’s flagship unit surged in India to erase all the losses triggered by a short sale report from Hindenburg Research in January 2023. The gains were driven by optimism around Adani Enterprises Ltd.’s inclusion in the nation’s benchmark stock index, the review of which is due later Friday.

Atlanta Fed President Raphael Bostic on Thursday reinforced the chorus from officials this week that the central bank needs to be patient on its next move as there is still considerable upward pressure on prices. Minutes of the Fed’s May meeting released this week showed policy makers coalesced around a desire to hold rates higher for longer and “many” questioned whether policy was restrictive enough to bring inflation down to their target.

Treasuries gained slightly in Asian trading after yield on the 10-year US sovereign bond popped over 5 basis points on Thursday.

In commodities, oil declined after hitting its lowest level in over three months on Thursday as the market flashed signs of weakness ahead of the US summer driving season. Elsewhere, gold climbed after three days of declines.

Key events this week:

  • Canada retail sales, Friday

  • Germany GDP, Friday

  • US durable goods, consumer sentiment, Friday

  • Fed’s Christopher Waller speaks, Friday

Some of the main market moves:

Stocks

  • S&P 500 futures rose 0.1% as of 2:38 p.m. Tokyo time

  • Nasdaq 100 futures was little changed

  • Japan’s Topix fell 0.4%

  • Australia’s S&P/ASX 200 fell 1.1%

  • Hong Kong’s Hang Seng fell 1.5%

  • The Shanghai Composite fell 0.3%

  • Euro Stoxx 50 futures fell 0.5%

Currencies

  • The Bloomberg Dollar Spot Index was little changed

  • The euro was little changed at $1.0810

  • The Japanese yen was little changed at 157.06 per dollar

  • The offshore yuan was little changed at 7.2590 per dollar

Cryptocurrencies

  • Bitcoin fell 0.9% to $67,176.57

  • Ether fell 0.1% to $3,752.54

Bonds

Commodities

  • West Texas Intermediate crude was little changed

  • Spot gold rose 0.3% to $2,336.56 an ounce

This story was produced with the assistance of Bloomberg Automation.

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