Stocks hit two-year highs, dollar tilts lower

Global shares hit their highest in over two years on Wednesday, supported by relatively robust earnings and a retreat in the dollar, although trouble among U.S. regional banks and skepticism over China’s efforts to support its markets made for cautious trading.

Bonds gained some respite after an aggressive sell-off that spilled into the early part of this week, following comments from Federal Reserve officials that did little to shift expectations for the outlook for monetary policy.

Early on Wednesday, the MSCI All-World index (.MIWD00000PUS), rose 0.1% to reach its highest since mid-January 2022, led in part by a rally in Chinese blue chips (.SSEC), which have gained almost 5% in the last two trading days alone.

In recent days, China’s regulators have announced further curbs on short selling and state investors said they were expanding their stock buying plans.

Bloomberg News also reported President Xi Jinping would discuss the stock market with financial regulators, though there was no confirmation this had happened or what was discussed.

“Markets have shown that their bar to turning more optimistic around the economy has been high,” said Galvin Chia, emerging markets strategist at NatWest. “There is also considerable uncertainty around what the government’s longer-term approach is towards markets.”

In Europe, stocks were mostly flat (.STOXX) in an earnings-heavy day, as a lift from consumer discretionaries such as LVMH (LVMH.PA), was offset by a drop in shares of pharmaceutical companies.

S&P 500 futures and Nasdaq futures were down 0.1%. Companies reporting earnings on Wednesday include Uber (NYSE: UBER), Walt Disney (NYSE: DIS), and PayPal (NASDAQ: PYPL).

The banking sector remained a concern as Moody’s downgraded New York Community Bancorp (NYCB.N), to junk citing pressure on its funding and liquidity. The stock lost 22% on Tuesday, to be down 60% since it reported surprise losses last week.

MORE FED SPEAKERS

The timing of U.S. rate cuts was no clearer after Federal Reserve Presidents Loretta Mester and Neel Kashkari welcomed the progress on inflation but signaled there was more work to do before policy could be eased.

Fed Philadelphia President Patrick Harker was more upbeat on achieving an economic soft landing and noted they were making “real progress” on inflation.

Fed Governors Adriana Kugler and Michelle Bowman, along with Presidents Thomas Barkin and Susan Collins also speak on Wednesday.

“The events of the last few days (have) seen markets try and absorb the fact that rate cuts might have to wait until much later in the year, and what any delay means for asset prices and valuations,” CMC Markets chief market strategist Michael Hewson said.

“While Powell’s candour in ruling out a rate cut in March caught markets by surprise this week also offers an opportunity to see if other members of the FOMC share his mindset.

In an interview at the weekend, Fed Chair Jerome Powell said the central bank could be “prudent” on the timing of rate cuts.

The probability of a U.S. rate cut as early as May now stands at just 39%, when it was considered a done deal only a week ago.

Futures imply around 122 basis points of easing for all of 2024, down from 145 basis points last week.

Treasuries regained some stability, leaving 10-year note yields steady at 4.094%, versus Monday’s top of 4.177%.

The drop in yields took some steam out of the U.S. dollar which eased to 147.85 yen and away from the recent 10-week peak of 148.90. The euro edged up 0.1% to $1.0767, while gold steadied around $2,035 an ounce, having fallen to $2,013.70 early in the week.

Oil prices found support from a U.S. Energy Department assessment that U.S. output would grow by 170,000 barrels per day (bpd) in 2024, instead of a previous estimate of 290,000 bpd.

Brent eased 0.1% at $78.52 a barrel, as did U.S. crude, at $73.27.

Source: https://www.reuters.com/markets/global-markets-wrapup-1-2024-02-07/