On Tuesday, both the dollar and stocks experienced a downturn in New York and London, with fading optimism regarding imminent interest rate cuts by central banks weighing heavily on market sentiment. This sentiment, in turn, prevented key pan-European and Japanese stock indices from surpassing previous record highs.
Impact of Earnings Reports and Economic Indicators
Walmart set a positive tone for the earnings season among US retailers, helping to mitigate losses on the Dow Jones Industrial Average. However, despite this boost, Europe’s broad STOXX 600 benchmark and Japan’s Nikkei index remained approximately 1% below their respective record peaks in 2022 and 1989.
Last week’s release of higher-than-expected US inflation data dampened expectations for an immediate initiation of the Federal Reserve’s easing cycle, halting the rally for US stocks in 2024. The majority of economists polled by Reuters now anticipate a Federal Reserve rate cut in June, with predictions leaning towards a delayed rather than an accelerated timeline.
Expert Insights and Market Dynamics
Phillip Colmar, a global strategist at MRB Partners in New York, expressed skepticism regarding the prevailing deflationary outlook, citing minimal economic slack as a key factor challenging this narrative. Colmar highlighted the flawed assumption of a “Goldilocks soft-landing scenario,” cautioning against overreliance on such optimistic projections amidst ongoing economic uncertainties.
Marvin Loh, a senior global macro strategist at State Street in Boston, emphasized the potential divergence in central bank expectations between the United States and other developed markets. Loh noted a reduction in rate cut expectations across various central banks since mid-January, attributing this shift to the differing economic performances globally.
Market Performance and Outlook
The dollar index, which measures the US currency against six major counterparts, witnessed a 0.30% decline, while MSCI’s global stocks gauge shed 0.45%. Despite European Central Bank (ECB) data indicating a slowdown in negotiated wage growth across the euro area, the STOXX 600 index only experienced a marginal loss of 0.09%.
On Wall Street, the Nasdaq index led losses, primarily driven by a 6.2% decline in chipmaker Nvidia’s stock ahead of its earnings report. The Dow Jones Industrial Average fell by 0.25%, the S&P 500 lost 0.78%, and the Nasdaq Composite dropped 1.42%.
Interest Rate Expectations and Bond Yields
The market response to interest rate outlooks beyond bonds remained subdued, with US economic growth potentially influencing future adjustments in central bank policies. The two-year Treasury yield, indicative of interest rate expectations, fell by 7.6 basis points, while the benchmark 10-year note yield decreased by 4.1 basis points.
Global Yield Trends and Chinese Rate Cut
Germany’s 10-year Bund yield experienced a decline of 3.8 basis points, contrasting with the euro’s 0.32% increase against the US dollar. The eurozone’s benchmark yield has risen by approximately 35 basis points since the beginning of the year, influenced by fluctuations in inflation and economic data worldwide.
In China, the five-year loan prime rate was reduced by 25 basis points to 3.95%, surpassing economists’ forecasts. This move contributed to gains in blue-chip stocks and Hong Kong’s Hang Seng index, with the yuan stabilizing after an initial decline.
US crude and Brent prices fluctuated, with US crude falling by 0.42% to $78.86 per barrel and Brent declining by 1.38% to $82.41 per barrel.
In conclusion, market sentiment was subdued amid diminishing expectations for imminent interest rate cuts by central banks, with economic indicators and earnings reports shaping investor confidence and asset performance.
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