(Bloomberg) — Central bankers continued to forcefully oppose market bets for lower interest rates, worsening the global sell-off in stocks and bonds.
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European Central Bank President Christine Lagarde and Governing Council member Klaas Knot warned on Wednesday that aggressive bets on cutting interest rates do not help policymakers in combating pressures persistent on prices. That followed comments Tuesday from Federal Reserve Governor Christopher Waller, who urged caution on the pace of easing.
Swap market prices for a March Fed rate cut fell to around 65% from 80% on Friday, while money markets pushed back bets on the timing of the ECB’s first quarter-point cut to June, from April.
“Inflation has never been a straight downward line, as we have seen in the United States and Europe,” said Luke Hickmore, chief investment officer at abrdn. “Rates will fall this year, but market expectations about the timing and extent of that decline will be very volatile.”
Futures on the Nasdaq 100 and S&P 500 fell about 0.5%, pointing to another day of weakness for U.S. stocks. The two-year Treasury yield – among the most sensitive to changes in monetary policy – climbed six basis points to 4.29% and the dollar extended its rally to a fourth day. The CBOE Volatility Index – Wall Street’s “fear gauge” – hit its highest level in two months.
At the same time, new concerns about the Chinese economy added another hurdle to stocks. U.S.-listed Chinese stocks fell in premarket trading, with the publicly traded KraneShares CSI China Internet Fund, which owns more than 30 Chinese technology companies listed in the U.S. and Hong Kong, trading lower by more than 3%.
Values of basic resources and luxury goods were among the biggest decliners in Europe on concerns about slowing demand in China, a key market. The Stoxx Europe 600 index fell more than 1%. All industry sectors were in the red, with real estate and retail among the hardest hit. German two-year yields rose five basis points to 2.65%.
Hong Kong’s Hang Seng Index fell nearly 4%. Mainland China’s benchmark CSI 300 index also fell 2.2%. The losses came after official figures showed that while China had met its 2023 economic target, the country’s real estate crisis had worsened and domestic demand remained sluggish.
Further evidence that the battle against inflation is not over came from the United Kingdom, where price increases unexpectedly accelerated for the first time in 10 months, prompting traders to reconsider are lowering their expectations for a rate cut from the Bank of England this year. Gilts fell and the pound rose as traders aggressively reduced their expectations for monetary policy easing this year.
In the commodities sector, oil fell as drag from a stronger U.S. dollar and broader risk aversion offset concerns over escalating tensions in the Middle East, including continued attacks on ships in the Red Sea by Iran-backed Houthi rebels.
Elsewhere, gold held steady after falling more than 1% on Tuesday to trade around $2,028 an ounce and Bitcoin fell below $43,000.
Key events this week:
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Retail sales, industrial production and business inventories in the United States, Wednesday
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Fed releases Beige Book survey on regional economic conditions on Wednesday
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New York Fed President John Williams speaks Wednesday
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ECB Governing Council member Boris Vujcic speaks in Davos on Wednesday
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Housing starts and jobless claims in the United States, Thursday
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Republican presidential primary debate in New Hampshire on Thursday
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The President of the ECB, Christine Lagarde, participates in the Davos round table on Thursday
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The ECB publishes the minutes of its December policy meeting on Thursday
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Atlanta Fed President Raphael Bostic speaks Thursday
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Retail sales in Canada, Friday
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Japan CPI, tertiary index, Friday
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U.S. Existing Home Sales, University of Michigan Consumer Sentiment, Friday
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ECB President Christine Lagarde and IMF Managing Director Kristalina Georgieva speak in Davos on Friday.
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San Francisco Fed President Mary Daly speaks Friday
Some of the main market movements:
Actions
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S&P 500 futures fell 0.4% as of 6:40 a.m. New York time
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Nasdaq 100 futures fell 0.4%
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Dow Jones Industrial Average futures fell 0.4%
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The Stoxx Europe 600 fell 1.2%
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The MSCI World index fell 0.5%
Currencies
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The Bloomberg Dollar Spot Index rose 0.1%
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The euro was little changed at $1.0877
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The British pound rose 0.4% to $1.2685
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The Japanese yen fell 0.4% to 147.78 per dollar
Cryptocurrencies
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Bitcoin fell 1.6% to $42,751.36
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Ether fell 2.4% to $2,545.57
Obligations
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The yield on 10-year Treasury bonds was little changed at 4.06%
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The German 10-year yield rose three basis points to 2.29%
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The UK 10-year yield rose 10 basis points to 3.90%
Raw materials
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West Texas Intermediate crude fell 2% to $70.98 a barrel
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Spot gold fell 0.1% to $2,025.82 an ounce
This story was produced with the help of Bloomberg Automation.
–With the help of Pearl Liu, Selcuk Gokoluk and Thyagaraju Adinarayan.
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