European Stocks Fall as Fed Eases U-Turn: Markets Wrap

(Bloomberg) — European stocks fell after a weak session in Asia after U.S. Federal Reserve officials pushed back on bets for aggressive interest rate cuts next year.

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The Stoxx Europe 600 index fell 0.4%, while U.S. stock futures rose slightly. The MSCI Asia Pacific index fell as much as 1.1%, the most since December 5.

The dollar remained broadly stable while two-year Treasury yields fell two basis points, paring gains made on Friday when New York Fed President John Williams led a chorus of officials in saying it was too early , to think about reducing the cost of credit.

The pullback could begin to blunt the “everything rally” after traders viewed earlier Fed signals as a green light to expand their bets on rate cuts next year, helping U.S. stocks post their biggest weekly gains in a month.

Central bankers from the US, Europe and Canada have already begun their battle with traders. Atlanta Fed President Raphael Bostic, who will vote on monetary policy next year, told Reuters he expects two interest rate cuts in 2024, but they will not begin until the third quarter. Separately, Chicago Fed President Austan Goolsbee said Sunday that it would be excessive to consider rate cuts until officials were convinced that inflation was on a path below its target. Bank of Canada Governor Tiff Macklem expressed a similar view.

“US markets need evidence that Fed resistance from NY Fed Williams and Atlanta Fed Bostic is misplaced,” Bob Savage, head of market strategy and insights at BNY Mellon Capital Markets, wrote in a note. “The focus of the coming week is the risk that financial conditions are easier everywhere, triggering more growth and inflation than forecast.”

The story goes on

In Europe, European Central Bank councilor Joachim Nagel said on Friday it was too early to think about cutting interest rates, while his counterpart Madis Muller said markets were rushing to ease monetary policy in the first half of next year put. ECB President Christine Lagarde said the bank had not discussed interest rate cuts at all.

Read more: Fed Chairman Goolsbee says it's too early to declare victory over inflation

Now attention turns to Japan as the country's central bank begins a two-day monetary policy meeting on Monday. As speculation grows that the Bank of Japan will soon end the world's last negative interest rate regime, economists believe April is the most likely time for a change. About 15% expect Ueda to end negative interest rates in January, according to a Bloomberg survey of more than 50 economists.

“The BOJ has no reason to rush into policy changes,” Societe General economists led by Wei Yao wrote in a note. “But markets will be watching for signs that the board is ready to end negative interest rates or end yield curve control.”

Read more: The BOJ reportedly sees no need to end negative interest rates next week

In commodities, gold prices rose slightly while oil prices rose, extending last week's rise as major shipping companies halted transit through the Red Sea amid escalating attacks on merchant ships.

Important events this week:

• The ECB holds a biennial conference on fiscal policy and EMU governance on Monday

• Pro-democracy media tycoon Jimmy Lai goes on trial in Hong Kong on Monday

• Annual reconstitution of the Nasdaq 100 index, Monday

• Minutes of the RBA's December policy meeting, Tuesday

• Bank of Japan decision, Tuesday

• Inflation in Canada, Tuesday

• Inflation in the Eurozone, Tuesday

• Atlanta Fed President Raphael Bostic speaks Tuesday

• New Zealand releases its half-year economic and financial update on Wednesday

• Key interest rates for Chinese loans, Wednesday

• British inflation, Wednesday

• Bank Indonesia interest rate decision, Thursday

• US GDP, Thursday

• Nike results, Thursday

• Inflation in Japan, Friday

• UK GDP, Friday

Some of the key moves in the markets:

Shares

• The Stoxx Europe 600 fell 0.4% at 8:02 a.m. London time

• S&P 500 futures rose 0.2%

• Nasdaq 100 futures were little changed

• Futures on the Dow Jones Industrial Average rose 0.2%

• The MSCI Asia Pacific Index fell 0.7%

• The MSCI Emerging Markets Index fell 0.4%

Currencies

• The Bloomberg Dollar Spot Index was little changed

• The euro rose 0.2% to $1.0920

• The Japanese yen fell 0.2% to 142.41 per dollar

• The offshore yuan was little changed at 7.1359 per dollar

• The British pound was little changed at $1.2693

Cryptocurrencies

• Bitcoin fell 1.8% to $41,116.38

• Ether fell 3.1% to $2,168.45

Tie up

• The yield on 10-year government bonds remained little changed at 3.91%

• The 10-year German government bond yield rose two basis points to 2.03%

• The 10-year UK government bond yield rose one basis point to 3.70%

raw materials

• Brent crude rose 0.7% to $77.05 a barrel

• Spot gold rose 0.2% to $2,022.70 an ounce

This story was produced with support from Bloomberg Automation.

– With assistance from Michael G. Wilson.

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