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US stock futures point to a weak opening on Wall Street
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Dollar index hits 2-week high
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Global stocks on the decline
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By Naomi Rovnick and Dhara Ranasinghe
LONDON, Jan 3 (Reuters) – Global stock markets extended their New Year's decline on Wednesday while the dollar held steady as market optimism over early U.S. interest rate cuts faded and the latest escalation in hostilities in the Middle East weighed on sentiment.
MSCI's broad world stock index fell 0.3% to its lowest level in nearly two weeks, while U.S. stock futures pointed to a weak opening for Wall Street.
Another sign that recent rapid gains in stocks and bonds have stalled is the rise in U.S. Treasury yields, while European stocks fell 0.7% and Asia-Pacific stocks outside Japan lost over 1%.
Caution is increasing ahead of the release of minutes from the US Federal Reserve's December meeting due at 19:00 GMT on Wednesday, as well as a series of key US data this week.
Fed officials in December forecast interest rate cuts of 75 basis points (bps) in 2024, boosting money market bets to about double the cuts that fueled a year-end cross-market rally.
“We had this huge rally at the end of last year when markets were convinced that there would be a soft (economic) landing, a cooling of inflation and a rapid transition to interest rate cuts,” said Russ Mould, investment director at AJ Bell.
“But if there is an unexpected hard landing or an inflation boom, the scenario could be a little different, so I think people are now pausing to think.”
Futures markets still see a 70 percent chance that the Fed will begin cutting U.S. borrowing costs from their current 22-year high starting in March. However, a Reuters analysis of recent comments from Fed policymakers shows that while many of them have noted improvements in inflation and some easing in wage pressures, most have not said that monetary easing is urgent.
This week's US data is likely to clarify the outlook, with the ISM manufacturing survey due later on Wednesday expected to show whether the central bank has new recession signals to worry about. The market-moving US non-farm payrolls report is due on Friday.
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Market sentiment was also dampened by increasing tensions in the Middle East.
Hamas deputy leader Saleh al-Arouri was killed in an Israeli drone strike in the Lebanese capital Beirut on Tuesday, Lebanese and Palestinian security sources said, raising the risk of the war in Gaza spreading far beyond the Palestinian enclave. Israel has neither confirmed nor denied that it killed Arouri.
Denmark's Maersk and German rival Hapag-Lloyd said on Tuesday their container ships would continue to avoid the Red Sea after Houthi fighters were blamed for a series of attacks on ships.
“The supply curves of raw materials, intermediate goods, intermediate products and end products remain much more volatile than one would like. “In addition, Western labor markets will remain structurally tight,” Rabobank said in a statement.
Futures markets forecast that Wall Street's S&P 500 index will open lower on Wednesday. The index came within striking distance of its all-time closing high last week as investors priced in aggressive rate cuts for 2024.
Shares of price-sensitive mega-cap stocks such as Nvidia, Apple and Tesla fell slightly in premarket trading. Apple shares take a hit
hit a seven-week low on Tuesday after Barclays downgraded its shares.
“I don't think the last two days represent a change in trend, but rather a decline in what is probably a good start to the year for equities,” said Tim Graf, head of macro strategy for EMEA at State Street Global Markets London.
Meanwhile, US Treasury yields continued to rise. The benchmark 10-year bond yield, a barometer of expected long-term borrowing costs, was last up 3 basis points at 3.97%. On Tuesday it briefly rose to over 4%.
The yield on 10-year German government bonds was stable at around 2%, while the yield on 10-year British government bonds was slightly higher at 3.65%.
The dollar index hit a new two-week high of 102.49 as interest rate cut bets faded, and was last up about a quarter of a percent.
The dollar gained 0.6% to 142.83 yen, while the euro slipped about a fifth of a percent to $1.0919
Brent crude futures were flat at $75.88 a barrel as expectations of sufficient supply for now outweighed concerns about disruptions to Red Sea shipping lanes.
Spot gold fell 0.5% to $2,048 an ounce.
(Reporting by Naomi Rovnick and Dhara Ranasinghe in London and Stella Qiu in Sydney; Editing by Chizu Nomiyama)
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