Global stocks dropped Monday as investors waited for the final round of transatlantic interest rates hikes from a trio central banks. They hope that after a long and arduous period of borrowing costs increases, there will be some relief.
Oil prices rose because a major pipeline that supplies the United States was still shut while Russian President Vladimir Putin threatened production cuts in retaliation to a Western price cap for its exports.
After data on Friday showed that U.S. producer price inflation had exceeded expectations, the dollar gained against the Japanese currency but fell against a basket currencies. This is in response to persistent inflationary pressures. The index will be released Tuesday and will show a decrease in core annual inflation.
“A heavy event calendar this week will define the core themes of 2023,” ING bank stated.
ING stated that market consensus was still “underappreciating the risk of inflation staying high longer” and “dangerously second-guessing the Fed” in terms rate cuts in second half next year.
The MSCI all-country stock index fell 0.3%. This is despite the benchmark losing 18% so far in 2018. It will wipe out any gains made in 2021.
The STOXX 600 Europe index was 0.7% lower.
Economists anticipate that the Federal Reserve will raise rates on Wednesday and the European Central Bank, Bank of England, and Bank of England, on Thursday. This is still a slower pace than the 75 basis-point hikes in recent meetings.
Patrick Spencer, Baird’s vice-chair of Equities, stated that central banks will take a more relaxed stance this week. However, Tuesday’s CPI data is crucial.
“It’s the final important week of the year. After this week, you don’t have any real catalysts. Spencer stated that if the CPI is low, then we can go to the races and get our year-end rally.”
Spencer stated that deflationary pressures are rising regardless of the CPI. Spencer noted that crude oil prices are down and iron ore, lumber, and house prices are also falling for the year.
“All the talk about recession, I believe it is in the price, it’s on the markets. Spencer stated that the key to recession is employment. He believes employment will be more robust than people think.
The futures of the S&P 500 and Nasdaq were unchanged.
ASIAN SHARES FALL
MSCI Asia’s broadest index of Asia-Pacific shares outside Japan fell 1.2%. This was despite almost all the gains from the previous week, which were attributed to optimism that China is finally opening its economy and removing its zero-COVID policy.
Japan’s Nikkei fell 0.2%
Chinese bluechips fell 1.1% while Hong Kong’s Hang Seng index dropped 2.2%. Investors’ attention shifted from the crippling COVID-19 curbs and to the surge of infections that is currently disrupting the economy.
The Fed will likely raise rates by 50 basis point on Wednesday at its 2022 last meeting, but the focus will be on updated economic projections and Fed Chair Jerome Powell’s press conference.
“We also want understand if Jay Powell opens up the door for a slowdown at a 25bp hike pace starting February – again in line with market prices, this could be taken as indicating that we’re closer towards the end of the hiking season and is a modest USD positive,” Chris Weston, Pepperstone head of research, said.
Chief U.S. economist at NatWest Kevin Cummins said that any surprise in November’s CPI report would not shift the Fed away from a 50 basis-point rate increase, but it would play an important role in Powell’s policy statement.
The U.S. Dollar fell 0.143% to 104.89 in currency markets. However, it was still not far from its five-month low of 104.1 a week earlier.
Sterling was flat at $1.2259 while the Australian dollar fell 0.3% to $0.6745.
On Monday, Treasury yields remained largely stable. The benchmark 10-year Treasury note yield fell to 3.5433% from its U.S. closing of 3.5670%. The yield on two-year Treasury notes was 4.3294%, slightly lower than its U.S. closing of 4.330%.
Brent crude futures fell 0.4% to $75.77 a bar, while U.S. West Texas Intermediate crude crude was $70.84 a bar, down 0.3%.
Spot gold was 0.4% less at $1,790 an ounce