Stock Selloff Deepens as Traders Adjust Rate Bets: Markets Wrap

(Bloomberg) — Central bankers continued their forceful push-back against market bets for interest rate cuts, deepening a global selloff across stocks and bonds.

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• Stock Selloff Deepens as Traders Adjust Rate Bets: Markets Wrap

European Central Bank President Christine Lagarde and Governing Council member Klaas Knot warned on Wednesday that aggressive bets on interest-rate cuts aren’t helping policymakers in the battle against lingering price pressures. That followed comments on Tuesday from Federal Reserve Governor Christopher Waller, who urged caution on the pace of easing.

Swaps market pricing for a Fed rate cut in March has dropped 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 was never going to be a straight line down, as we have seen in the US and Europe,” said Luke Hickmore, investment director at abrdn. “Rates will fall this year but market expectations around when and how much are going to be very volatile.”

Futures on the Nasdaq 100 and S&P 500 fell around 0.5%, suggesting another weak day ahead for US equities. The Treasury two-year 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” — climbed to a two-month high.

Meanwhile, fresh concerns about China’s economy added another headwind for equities. US-listed Chinese stocks fell in premarket trading, with the exchange-traded KraneShares CSI China Internet Fund, which holds over 30 US- and Hong Kong-listed Chinese tech firms, trading more than 3% lower.

Basic resources and luxury-goods stocks were among the biggest decliners in Europe amid worries about slackening demand in China, a key market. The Stoxx Europe 600 index slumped more than 1%. All industry sectors were in the red, with real estate and retailers among the hardest hit. German two-year yields rose five basis points to 2.65%.

Hong Kong’s Hang Seng Index tanked nearly 4%. The CSI 300 mainland Chinese benchmark also fell 2.2%. The losses came after official figures showed while China reached its 2023 economic goal, the country’s housing slump has worsened and domestic demand remained listless.

Still more evidence that the battle against inflation isn’t over came from the UK, where price increases accelerated unexpectedly for the first time in 10-months, prompting traders to scale back their expectations for rate cuts from the Bank of England this year. Gilts tumbled and the pound gained as traders aggressively trimmed expectations for monetary-policy easing this year.

In commodities, oil declined as the drag from a stronger US dollar and broader risk-off tone offset concerns over escalating Middle East tensions, including continued attacks on ships in the Red Sea by Iran-backed Houthi rebels.

Elsewhere, gold was steady after a Tuesday decline of more than 1% to trade around $2,028 per ounce and Bitcoin dropped below $43,000.

Key events this week:

• US retail sales, industrial production, business inventories, Wednesday

• Fed issues Beige Book survey of regional economic conditions, Wednesday

• New York Fed President John Williams speaks, Wednesday

• ECB Governing Council member Boris Vujcic speaks at Davos, Wednesday

• US housing starts, initial jobless claims, Thursday

• Republican presidential primary debate in New Hampshire, Thursday

• ECB President Christine Lagarde participates in Davos panel discussion, Thursday

• ECB publishes account of December policy meeting, Thursday

• Atlanta Fed President Raphael Bostic speaks, Thursday

• Canada retail sales, Friday

• Japan CPI, tertiary index, Friday

• US existing home sales, University of Michigan consumer sentiment, Friday

• ECB President Christine Lagarde and IMF Managing Director Kristalina Georgieva speak in Davos, Friday

• San Francisco Fed President Mary Daly speaks, Friday

Some of the main moves in markets:

Stocks

• S&P 500 futures fell 0.4% as of 6:40 a.m. New York time

• Nasdaq 100 futures fell 0.4%

• Futures on the Dow Jones Industrial Average fell 0.4%

• The Stoxx Europe 600 fell 1.2%

• The MSCI World index fell 0.5%

Currencies

• The Bloomberg Dollar Spot Index rose 0.1%

• The euro was little changed at $1.0877

• The British pound rose 0.4% to $1.2685

• The Japanese yen fell 0.4% to 147.78 per dollar

Cryptocurrencies

• Bitcoin fell 1.6% to $42,751.36

• Ether fell 2.4% to $2,545.57

Bonds

• The yield on 10-year Treasuries was little changed at 4.06%

• Germany’s 10-year yield advanced three basis points to 2.29%

• Britain’s 10-year yield advanced 10 basis points to 3.90%

Commodities

• West Texas Intermediate crude fell 2% to $70.98 a barrel

• Spot gold fell 0.1% to $2,025.82 an ounce

This story was produced with the assistance of Bloomberg Automation.

–With assistance from Pearl Liu, Selcuk Gokoluk and Thyagaraju Adinarayan.

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