Stocks extended global gains in risk assets, driven by China’s reopening trade and expectations of slower rate hikes. The dollar weakened and oil rallied.
(Bloomberg) — Stocks extended global gains in risk assets, driven by China’s reopening trade and expectations of slower rate hikes. The dollar weakened and oil rallied.
Wall Street equity futures pointed to further gains after the S&P 500 and Nasdaq 100 jumped in excess of 2% on Friday. In premarket trading, Lululemon Athletica Inc. plunged after the athletic apparel maker forecast a weaker gross margin. Europe’s Stoxx 600 Index climbed, with mining and energy shares among those leading the advance amid optimism over China’s demand for raw materials.
The MSCI Emerging Markets Index is on track to enter a bull market after surging more than 20% from its October low, boosted by Chinese stocks after the nation pivoted on its Covid strategy and offered more policy support for the economy.
The dollar extended Friday’s drop as traders bet that the Federal Reserve will slow rate hikes, with the Institute for Supply Management’s index of services in contraction territory and wage growth slowing. Yields on benchmark 10-year Treasuries climbed.
The US December inflation report due Thursday will be front of mind for traders after last week’s jobs data failed to offer a clear picture, with unemployment at its lowest level in decades, while wage gains were weak. Kansas City Federal Reserve’s Esther George on Friday warned that officials will have a tough road ahead as they attempt to balance inflation and employment while others have previously emphasized rates will be higher, and held there for longer than earlier anticipated.
“I don’t think it’s time to bring back the Goldilocks playbook for markets just yet because this is different from the past decade,” BlackRock Inc.’s Karim Chedid, head of investment strategy for iShares EMEA, said on Bloomberg Television. “We did see wages are coming off a bit, but when we consider where wages are compared to the inflation target of 2%, we’re still quite some distance from where the Fed wants it to be.”
Read More: Fed Officials Call for More Hikes Even as Price Pressures Cool
Swaps contracts show investors expect the policy rate to peak at under 5% this cycle, down from 5.06% just before Friday’s jobs report. While traders remain divided about the size of February’s hike, with 32 basis points of tightening priced in, it appears that a quarter-point move is seen as more likely than a half-point increase.
While pressure on the Fed to hike by 50 basis points on Feb. 1 has eased, “policy makers appear to be increasingly frustrated by market-pricing at odds with Fed signaling in terms of both the terminal funds rate and timing of initial rate cut,” BNP Paribas economists led by Carl Riccadonna wrote in a note to clients. “This could tilt their bias toward a more forceful response at the next meeting.”
Meanwhile, Morgan Stanley strategists warned that US equities face much sharper declines than many pessimists expect with the specter of recession likely to compound their biggest annual slump since the global financial crisis.
Michael Wilson — long one of the most vocal bears on US stocks — said while investors are generally pessimistic about the outlook for economic growth, corporate profit estimates are still too high and the equity risk premium is at its lowest since the run-up to 2008. The drop in the S&P 500 could be as much as 22% from current levels.
Elsewhere, oil jumped after a Chinese central bank official said the nation’s growth would be back on track soon as Beijing provides more financial support to households and companies. Gold extended gains after the latest US data added to signs the Fed will become less hawkish this year.
Investors are keeping a close eye on Brazilian assets after thousands of supporters of former President Jair Bolsonaro stormed the country’s top government institutions in an insurrection that will test the leadership of President Luiz Inacio Lula da Silva just a week after he took office.
Read More: Brazil Assets Look Resilient as Fear Over Riots Begins to Abate
Key events this week:
- Atlanta Fed President Raphael Bostic at the Rotary Club of Atlanta, Monday
- France industrial production, Tuesday
- US wholesale inventories, Tuesday
- Fed Chair Jerome Powell among speakers at Riksbank symposium in Stockholm, Tuesday
- ECB Governing Council members speak at Euromoney conference in Vienna, Wednesday
- US December CPI, Thursday
- US 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
- France, Spain CPI, Friday
- Canada existing home sales, Friday
- China trade, Friday
- UK industrial production, Friday
- University of Michigan consumer sentiment, Friday
- BlackRock, Citigroup, JPMorgan Chase, Wells Fargo report earnings, Friday
Some of the main moves in markets:
Stocks
- S&P 500 futures rose 0.5% as of 8:27 a.m. New York time
- Nasdaq 100 futures rose 0.6%
- Futures on the Dow Jones Industrial Average rose 0.3%
- The Stoxx Europe 600 rose 0.6%
- The MSCI World index rose 0.7%
Currencies
- The Bloomberg Dollar Spot Index fell 0.6%
- The euro rose 0.7% to $1.0719
- The British pound rose 0.7% to $1.2177
- The Japanese yen rose 0.2% to 131.87 per dollar
Cryptocurrencies
- Bitcoin rose 1.8% to $17,270.33
- Ether rose 4.1% to $1,322.14
Bonds
- The yield on 10-year Treasuries advanced two basis points to 3.58%
- Germany’s 10-year yield advanced five basis points to 2.26%
- Britain’s 10-year yield advanced six basis points to 3.53%
Commodities
- West Texas Intermediate crude rose 3.4% to $76.29 a barrel
- Gold futures rose 0.6% to $1,880.30 an ounce
This story was produced with the assistance of Bloomberg Automation.
–With assistance from Michael G. Wilson, Matthew Burgess, Tony Jordan and Allegra Catelli.
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