Global Equities Rise and Treasury Yields Rebound on Uncertain Economic Outlook
Global equities saw a slight increase and Treasury yields rebounded on Monday after last week’s surge in stocks and bonds, as hopes for imminent interest rate cuts faded. This comes as markets assess an improving but still uncertain outlook for growth and inflation.
Wall Street’s three main stock indices managed to eke out gains, while major European equity indices closed down. The yield on 10-year Treasuries rose by 9.1 basis points (bps) to 4.649%, partially reversing the 29 bps decline last week, which marked the benchmark note’s largest weekly drop since March.
Although a benign U.S. payrolls report on Friday and positive productivity numbers indicated a cooling American labor market, which could lead the Federal Reserve to halt further rate increases, there are concerns that lower market yields may result in increased corporate loans and spur economic growth. Gennadiy Goldberg, head of U.S. rates strategy at TD Securities in New York, explained that this situation represents a “double-edged sword.”
Investors are currently in “wait-and-see mode” as they assess whether the economy will slow further or prove to be more resilient than the Fed would prefer. Goldberg even suggested that the central bank might be compelled to raise rates to ensure that inflation remains subdued.
Future market expectations now show the Fed’s overnight lending rate remaining above 5% until next June instead of July. Market pricing has also factored in almost 85 basis points of rate cuts by the end of 2024, surpassing the 50 basis points of cuts recently anticipated by policymakers.
MSCI’s global stocks gauge closed up 0.4%, marking its sixth consecutive session of gains. Conversely, the pan-European STOXX 600 index fell by 0.16%, with major stock indices in France, Germany, Italy, and Spain all experiencing declines.
On Wall Street, the Dow Jones Industrial Average rose by 0.1%, the S&P 500 gained 0.18%, and the Nasdaq Composite added 0.3%.
Anthony Saglimbene, chief market strategist at Ameriprise Financial in Troy, Michigan, emphasized the need for “equilibrium and stabilization in rates” to instill confidence in the market. Such stabilization could provide a boost for equities and bond markets. However, Saglimbene noted that the market is not yet at that point and investors are unable to accurately price the cost of capital and assess the outlook for debt refinancing.
Furthermore, market expectations indicate an 80% probability that the European Central Bank (ECB) will cut rates by April, while the Bank of England (BoE) is expected to ease rates in August.
Central bankers will have the chance to express their views on this dovish outlook, with at least nine Federal Reserve members, including Chair Jerome Powell, scheduled to speak this week. Additionally, speakers from the BoE and ECB are also on the docket.
Australia’s central bank is considered likely to resume raising rates at its policy meeting on Tuesday due to stubbornly high inflation.
The Bank of Japan is also gradually tightening its policy, with the head of the central bank stating on Monday that it is closer to achieving its inflation target, although it is still insufficient to end ultra-loose policy.
Lower borrowing costs expectations boosted shares in Asia, as they missed out on Friday’s rally triggered by positive U.S. jobs data. MSCI’s broadest index of Asia-Pacific shares outside Japan gained 2.1% on Monday.
South Korea stood out with a 5.66% climb as authorities reimposed a ban on short-selling until mid-2024.
Germany’s bund yield, the euro zone benchmark, rose by 0.8 bps to 2.746% after seven sessions of declines.
The retreat in Treasury yields last week affected the dollar’s performance. The dollar index, which measures the U.S. currency against six others, rose by 0.12% to 105.19 after falling 1.4% last week.
The euro slipped by 0.05% to $1.0723 after briefly reaching an eight-week high of 1.0756 due to a 1% surge on Friday. Despite recent losses against the yen, the dollar currently stands at 149.975 yen, slightly below its recent peak of 151.74.
The dollar’s decline and lower yields have provided support for gold, as investors cautiously return to riskier assets. U.S. gold futures settled 0.5% lower at $1,988.60 per ounce.
Oil prices saw a small increase after Saudi Arabia and Russia reaffirmed their commitment to extra voluntary oil supply cuts until the end of the year.
Brent crude futures settled 29 cents higher at $85.18 per barrel, while U.S. West Texas Intermediate crude settled up 31 cents at $80.82 per barrel.
More detail via Yahoo! Finance here… ( Image via Yahoo! Finance )