Following robust economic indicators and a surge in commodity prices, Asian stock markets are poised to mirror Wall Street's downturn. This trend is driven by growing anticipation that key global central banks will maintain elevated interest rates for an extended period.
Futures in Japan and Australia are trending downwards, with Hong Kong's market showing minimal change. Recent data surpassing expectations in the US regarding job openings and factory orders have fueled doubts about the Federal Reserve's pace of easing. This skepticism has led to a projection of fewer rate cuts in 2024 than previously forecasted by the central bank, pushing 10-year yields to their highest mark since November and exerting pressure on US equities.
According to Fawad Razaqzada from City Index and Forex.com, the appeal of stock investments becomes challenging as yields increase. He notes that the rising prices of crude oil further complicate the inflation outlook, and with several job reports due this week, market volatility is anticipated.
The Citigroup Global Economic Surprise Index, which compares actual data against analysts' expectations, is near its annual peak, indicating stronger-than-expected economic performance, especially in the US and China's manufacturing sectors.
The S&P 500 experienced its most significant drop in nearly a month, with Tesla Inc. (TSLA, Financial) leading the decline among large-cap stocks. A small-cap index plummeted by almost 2%, and the VIX, Wall Street's favored volatility index, saw an uptick. Meanwhile, US 10-year yields climbed, and commodities like US oil, copper, and gold witnessed notable gains. Conversely, Bitcoin's value dipped slightly.
Traders are keenly awaiting remarks from Fed Chair Jerome Powell, considering statements from Federal Reserve officials Mary Daly and Loretta Mester, who anticipate three rate cuts in 2024 but suggest a cautious approach to reducing borrowing costs.
Swap traders now foresee approximately 65 basis points of rate cuts this year, which is less than the 75 basis points the Fed's "dot plot" forecast suggests. Gargi Chaudhuri from BlackRock believes that the Fed is on track for a soft landing, initiating rate cuts in the latter half of the year. However, the likelihood of only two rate cuts appears greater now, given the reduced risks to economic growth.
Despite the pushback on Fed cut projections, US stocks have rallied from their October lows. This disconnect between equity markets and rate expectations raises concerns, with JPMorgan Chase & Co. strategists suggesting that earnings acceleration is necessary to bridge this gap. Morgan Stanley Investment Management's Andrew Slimmon argues that a cautious Fed indicates a robust economy, which ultimately benefits equities.
This week, several key events, including PMI readings, unemployment data, and various Fed officials' speeches, are likely to influence market movements.
