Stocks in Europe Drop After Hawkish Fed Comments: Markets Wrap

(Bloomberg) — European stocks fell and US equity futures edged lower as investors weighed hawkish comments from Federal Reserve officials and looked toward the release of US inflation data on Thursday for clarity on the trajectory for interest rates.

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The Stoxx Europe 600 Index dropped 0.7%, retreating from an eight-month high as construction and retail stocks led declines. Contracts on the S&P 500 and Nasdaq 100 were about 0.2% lower.

Traders hoping for a quick end to aggressive rate hikes as global inflation cools had a reality check on Monday, when San Francisco Fed president Mary Daly said she expects the central bank to raise rates to somewhere over 5%. Her Atlanta counterpart Raphael Bostic said policy makers should hike above 5% by early in the second quarter and then go on hold for “a long time.” Fed Chairman Jerome Powell speaks later at an event in Sweden.

Those betting on slower hikes are left waiting on Thursday’s US inflation report, which will come out almost a week after the latest jobs data showed wage growth has decelerated. The figures will be among the last such readings Fed policy makers will see before their Jan. 31-Feb. 1 gathering.

“Expect some profit taking, position squaring ahead of the CPI print later this week,” said Craig Johnson, chief technical research analyst at Piper Sandler & Co. “That is the next major event for global markets. I suspect most traders will be pretty flat coming into the economic print.”

The Bloomberg Dollar Spot Index was little changed. Treasury 10-year yields edged higher to 3.55%. Japan’s 10-year yield was at 0.5%, the ceiling for the Bank of Japan’s yield-curve control policy.

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“In addition to the probability of interest rates remaining high and a possible economic slowdown, any bullishness triggered by slowing inflation may be offset by stocks still-high valuations and overly optimistic earnings expectations,” said Chris Larkin at E*Trade from Morgan Stanley. “It could be a recipe for choppy near-term and long-term trading.”

Concerns about recessions in the US and Europe this year have been countered by renewed optimism over China. The world’s second-largest economy made a U-turn on strict Covid restrictions in December and swiftly followed up with other market-friendly changes.

The Chinese economy is now forecast to expand by 4.8% this year, according to data compiled by Bloomberg. Still, deflationary pressure worsened in the fourth quarter, with price growth likely to be subdued even when the economy rebounds later this year, according to China Beige Book International.

Key events this week:

• US wholesale inventories, Tuesday

• Fed Chair Jerome Powell among speakers at Riksbank symposium in Stockholm, Tuesday

• World Bank expected to release global economic prospects report, Tuesday

• ECB Governing Council members speak at Euromoney conference in Vienna, Wednesday

• US CPI, initial jobless claims, Thursday

• St Louis Fed President James Bullard at Wisconsin Bankers Association virtual event, Thursday

• Richmond Fed President Thomas Barkin speaks at VBA/VA Chamber, Thursday

• China trade, Friday

• US University of Michigan consumer sentiment, Friday

• Citigroup, JPMorgan Chase, Wells Fargo report earnings, Friday

This week’s MLIVE Pulse Survey:

Some of the main moves in markets:

Stocks

• The Stoxx Europe 600 fell 0.7% as of 8:13 a.m. London time

• S&P 500 futures fell 0.2%

• Nasdaq 100 futures fell 0.3%

• Futures on the Dow Jones Industrial Average fell 0.2%

• The MSCI Asia Pacific Index fell 0.2%

• The MSCI Emerging Markets Index fell 0.2%

Currencies

• The Bloomberg Dollar Spot Index was little changed

• The euro rose 0.1% to $1.0741

• The Japanese yen fell 0.2% to 132.08 per dollar

• The offshore yuan fell 0.1% to 6.7893 per dollar

• The British pound fell 0.2% to $1.2163

Cryptocurrencies

• Bitcoin was little changed at $17,193.14

• Ether rose 0.3% to $1,322.6

Bonds

• The yield on 10-year Treasuries advanced two basis points to 3.55%

• Germany’s 10-year yield advanced four basis points to 2.27%

• Britain’s 10-year yield advanced three basis points to 3.56%

Commodities

This story was produced with the assistance of Bloomberg Automation.

–With assistance from Abhishek Vishnoi, Youkyung Lee and Nicholas Reynolds.

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