By Herbert Lash and Alun John
NEW YORK/LONDON (Reuters) -A gauge of global stocks rose on Monday, with European shares surging to a fresh two-year high, and bond yields eased as markets scaled back ambitious bets at the end of 2023 on rate cuts by the Federal Reserve and other major central banks.
Wall Street also edged higher, with the S&P 500 poised to set a new record closing high, at the start of a week packed with big corporate earnings, European inflation data, Federal Reserve and Bank of England meetings and U.S. employment data.
Europe’s broad STOXX 600 index briefly touched a fresh two-year high as it closed up 0.2% after posting its biggest weekly gain in three months last week. [.EU]
The market is trying to understand the outlook for the U.S. economy as it unlikely will require the deep interest rate cuts by the Fed it has priced in, said Phillip Nelson, head of asset allocation at NEPC, an investment consultant for institutional investors in Boston.
Absent geopolitical shocks, the U.S. economy will grow better than expected with just a few areas underperforming, he said.
MSCI’s U.S.-centric gauge of global equity performance gained 0.67%, while on Wall Street, the Dow Jones Industrial Average rose 0.51%, the S&P 500 gained 0.71% and the Nasdaq Composite added 1.07%.
The S&P 500 has notched five all-time closing highs so far in January. Megacap earnings will be scrutinized this week after disappointing forecasts from Intel and Tesla last week deepened concerns about the valuation of the megacapp growth stocks that spearheaded the rally at year-end 2023.
Microsoft, which through its partnership with Open AI piqued market interest about artificial intelligence in 2023, is expected to report a 15.8% jump in quarterly revenue on Tuesday. The stock was up 1.2% in afternoon trading.
Results from other members of the Magnificent Seven – Alphabet, Apple, Meta Platforms and Amazon.com – also are due this week, in addition to heavyweights Exxon Mobil, Chevron, Qualcomm, Merck, Pfizer and Boeing.
The euro sank to almost a seven-week low, breaking below the 1.08 mark, as the market dialed back expectations of the extent of rate cuts this year by the Fed and European Central Bank (ECB), said Marc Chandler, chief market strategist at Bannockburn Global Forex in New York.
“We’re still reacting and correcting to what happened in Q4 last year,” Chandler said.
“The market got in its head there’d be aggressive rate cuts not just by the Fed, but by the Bank of England and the ECB. The dollar sold off in that environment,” he said.
The dollar index retreated, down 0.13%, while the euro slid 0.16% at $1.0835 after falling to $1.0797. The euro may be poised for a weak February, as the single currency has declined versus the dollar the past seven years during the month, he said.
Investors await the press conference with Fed Chair Jerome Powell and the statement by the U.S. central bank at the conclusion of a two-day policy meeting on Wednesday, and the U.S. unemployment report on Friday.
Policymakers are expected to hold the Fed’s target interest rate steady at a range of 5.25%-5.50%, but some investors believe the U.S. central bank could drop its hiking bias.
The yield on the benchmark 10-year Treasury note fell 9 basis points to 4.070%, while the European benchmark – the 10 year German bund – slid 0.7 basis points to 2.231%.
Treasury yields dropped sharply in November and December, helping equity markets to rally on expectations that Fed rate cuts could come as soon as March. But yields have risen this year as traders pared back rate cut bets.
Treasury yields fell further after the Treasury Department said late in the session that it would need to borrow less than its previous estimates.
Concerns over a wave of supply due to the increasing federal deficit pushed yields near two-decade highs in October, though signs that inflation is cooling and the U.S. economy may be on pace for a soft landing has helped bring yields down since.
Asian shares rose as new steps by Beijing to stabilize the local market outweighed the drag on sentiment from a Hong Kong court order to liquidate property giant China Evergrande.
Investors were also sensitive to geopolitical risks with oil rising after a Houthi missile attack caused a fire on a fuel tanker in the Red Sea and a drone attack killed three U.S. troops in Jordan.
In Asia, the main drag to stocks came from a Hong Kong court order to liquidate Evergrande, the poster child of China’s property meltdown.
Hong Kong’s Hang Seng trimmed gains on the news and closed up 0.78%, having earlier been up nearly 2% on the back of China’s securities regulator saying on Sunday it would fully suspend the lending of restricted shares.
Mainland Chinese blue chips had struggled to make headway early in the session, and eventually slumped 0.9%.
Oil prices fell more than a dollar a barrel as China’s ailing property sector sparked demand worries, causing traders to reassess the supply risk premium from escalating tensions in the Middle East.
U.S. crude futures settled down $1.23 at $76.78 a barrel, and Brent fell $1.15 to end at $82.40 a barrel.
U.S. gold futures settled 0.4% higher at $2025.40 an ounce.
(Reporting by Kevin Buckland; Additional reporting by Stella Qiu; Editing by Kylie MacLellan and Mark Potter)
