Stocks maintain confidence in interest rate cuts as bond rally falters: Markets wrap

(Bloomberg) — Stock markets resumed their climb as traders added to bets, as central bankers brace for a global policy pivot toward lower interest rates. The bond rally stalled with the yield on US 10-year bonds rising towards 4.2%.

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US stock futures rose as the Stoxx 600 index traded near a four-month high. Bitcoin traded near the $44,000 mark in the longest winning streak for the largest cryptocurrency since May, supported by expectations for looser monetary policy.

Traders are now debating the staying power of the rally built on hopes of a sharp shift in policy. Recent dovish comments from central bankers may not serve as confirmation that they are preparing for a shift to easy policy, Craig Erlam, senior market analyst at OANDA, wrote in a note to clients. Excessive technical factors and the belief that the Fed will not cut interest rates as quickly as markets expect have prompted bearish warnings from Wall Street heavyweights.

“It is now clear that there will be a major shift away from central banking,” Erlam wrote. “Whether that will be enough to form the much-talked about pivot this year may determine whether markets continue to price in the March cut, as a shift of this magnitude should be evident.”

It was Europe’s action that led to the recent rise in bond prices, after the European Central Bank’s more hawkish officials said on Tuesday that inflation was showing a “significant” slowdown. The rise found greater momentum from weaker-than-expected labor market data out of the United States, indicating easing inflationary pressures on wages, giving the Federal Reserve room to start cutting interest rates.

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A sovereign debt index that excludes Treasuries rose to the highest level since April 2022, as interest rate traders shifted to betting that the European Central Bank will cut interest rates even before the Fed. US government bonds are also set to post their first annual gain in three years, as bond investors prepare to put an end to the economic resilience that has made 2023 so difficult.

Global bonds continue to rise as interest rate cut bets appear everywhere

Markets priced in six quarter-point interest rate cuts by the European Central Bank in 2024 earlier on Wednesday, a move that would see the key interest rate cut by 150 basis points to 2.5%. German factory orders fell unexpectedly in October, highlighting the extent to which manufacturing in Europe’s largest economy remains in disarray.

“Europe faces both cyclical and structural challenges, and that’s what’s causing a lot of this volatility and volatility around what markets expect the ECB to do in the coming weeks and quarters,” said Stephanie Niven, portfolio manager at Ninety One UK Ltd. He said in an interview with Bloomberg TV.

Among individual stocks, shares of British American Tobacco Plc fell more than 9%, the biggest decline since March 2020, after it said it would write down the value of some of its US cigarette brands by about 25 billion pounds ($31.5 billion). Merck KGaA lost 12%, the biggest decline among members of the Stoxx 600, after the failure of an Evobrutiniban trial dealt a blow to the German company’s plans to produce another blockbuster drug.

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In U.S. pre-market trading, Shake Shack rose after the fast-food restaurant was upgraded to a strong buy from an outperform at Raymond James, which sees upside potential for stocking margin estimates.

Main events this week:

  • US private sector employment report ADP, trade balance, Wednesday

  • The CEOs of Wall Street’s biggest banks, including JPMorgan, Citigroup, Goldman Sachs, Morgan Stanley and Bank of America, are expected to testify about regulatory oversight before the Senate Banking Committee on Wednesday.

  • Bank of Canada monetary policy meeting on Wednesday

  • The Bank of England releases its semi-annual report on the stability of the UK financial system and holds a press conference on Wednesday

  • Chinese trade, foreign exchange reserves, Thursday

  • Eurozone GDP, Thursday

  • German industrial production, Thursday

  • US Wholesale Inventories, Initial Jobless Claims, Thursday

  • German Consumer Price Index, Friday

  • Japanese household spending, GDP, Friday

  • RBA Chief Financial Stability Officer Andrea Brichetto speaks at the Sydney Banking and Financial Stability Conference, Friday

  • US jobs report, consumer confidence from the University of Michigan, Friday

Some key movements in the markets:

Stores

  • S&P 500 futures rose 0.2% as of 6:53 a.m. New York time

  • Nasdaq 100 futures rose 0.3%

  • Dow Jones Industrial Average futures rose 0.1%

  • The Stoxx Europe 600 index rose 0.4%.

  • MSCI World Index rose 0.2%

Currencies

  • The Bloomberg Dollar Spot Index was little changed

  • The euro fell 0.1 percent to $1.0781

  • There was little change in the pound sterling at $1.2590

  • The Japanese yen fell 0.1 percent to 147.37 yen to the dollar

Digital currencies

  • Bitcoin fell 0.4% to $43,710.37

  • Ethereum fell 1% to $2,249.65

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Bonds

  • The yield on 10-year Treasury bonds rose by three basis points to 4.19%.

  • The yield on 10-year German bonds rose one basis point to 2.26%.

  • There was little change in the yield on British 10-year bonds at 4.03%.

Goods

  • West Texas Intermediate crude fell 0.8% to $71.73 a barrel

  • Gold in spot transactions rose 0.1 percent to $2,021.70 per ounce

This story was produced with assistance from Bloomberg Automation.

-With assistance from Farah Al-Bahrawy and Garfield Reynolds.

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