(Bloomberg) — European stocks and bonds fell after European Central Bank officials dismissed expectations for rapid interest rate cuts, although data from Germany underscored a difficult backdrop for economic growth and corporate earnings.
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The Stoxx Europe 600 index slipped 0.5% at the close of trading, extending its weak start to the year. Consumer goods and retailers led the decline after data showed the German economy contracted for the first time since the pandemic hit last year. The yield on 10-year German government bonds rose about five basis points to a one-month high.
Persistent inflation and geopolitical risks will prevent the ECB from cutting interest rates this year, even if a recession can no longer be ruled out, according to ECB Governing Council member Robert Holzmann. Along with colleagues such as ECB President Christine Lagarde, ECB Governing Council member Constantinos Herodotu and chief economist Philip Lane, he warned that it was still too early to talk about reducing borrowing costs.
Traders are betting on six quarter-point interest rate cuts from the ECB starting in April, while economists expect the first of four cuts in June. Signs of economic weakness in the region support their argument: Germany reported a 0.3% contraction in the fourth quarter on Monday and an output decline of the same magnitude for all of 2023. Still, Bundesbank President Joachim Nagel agreed that any easing was premature to discuss monetary policy, suggesting that there will be no movement before the summer.
“We are now at a point where bad economic news no longer translates into good news for the stock market,” said Benoit Péloille, chief investment officer at Natixis Wealth Management. In the United States, too, the market rate cut for interest rate cuts of up to six quarter points may be “excessive; Bad economic news will start to hurt,” he said.
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U.S. stock index futures were unchanged as equity and Treasury spot markets were closed on Monday for a holiday. A measure of the dollar rose slightly.
Among individual stock moves in Europe, Dassault Aviation SA plunged after the French aircraft maker reported a decline in jet orders for 2023. Delivery Hero SE and Just Eat Takeaway.com NV fell after analysts at BNP Paribas recommended Exane stay away from the European food delivery sector. Volvo Car AB extended a decline triggered on Friday when it said it was temporarily halting some production due to delivery delays caused by attacks on the Red Sea.
The MSCI Asia Pacific stock index rose for the third time. In Taiwan, stocks rose after the Democratic Progressive Party won the presidential election and the more China-friendly Kuomintang won too few seats to control the assembly.
China's CSI 300 index fluctuated between gains and losses amid speculation that officials might cut the required reserve ratio after the People's Bank of China unexpectedly kept the interest rate on its one-year policy loans at 2.5% on Monday. That contradicted economists' expectations of a 10 basis point cut in the so-called medium-term credit facility.
“Rate cuts are probably still possible, but China appears to be taking a more measured approach to monetary easing,” said Marvin Chen, an analyst at Bloomberg Intelligence in Hong Kong.
In addition to more U.S. earnings reports, investors this week will focus on inflation numbers in Germany and Britain, as well as a number of political leaders and officials, including Chinese Premier Li Qiang, attending the annual WEF. A speech by Federal Reserve Governor Christopher Waller after officials tried to dampen expectations of an impending interest rate cut last week will also be closely watched.
In commodities, oil prices fell as weak fundamentals offset the risk that airstrikes by the U.S. and its allies against the Houthis would spark a wider conflict and disrupt crude flows from the Middle East. Meanwhile, European natural gas futures fell to their lowest level since August, underscoring the region's success in improving supplies since the energy crisis in 2022.
Some key events in the markets this week:
The World Economic Forum in Davos begins on Monday with this year's theme “Rebuilding Trust.”
On Monday, Republicans will meet in Iowa, the first nomination contests for the 2024 US presidential election
Japan PPI, Tuesday
Consumer price index for Germany, expectations from the ZEW survey, Tuesday
Unemployment in Britain, Tuesday
US Empire Manufacturing, Tuesday
Goldman Sachs Group Inc. and Morgan Stanley report earnings on Tuesday
Federal Reserve Governor Christopher Waller speaks Tuesday
China's GDP, property prices, retail sales and industrial production, Wednesday
Eurozone CPI, Wednesday
UK CPI, Wednesday
US retail sales, industrial production, corporate inventories, Wednesday
The Federal Reserve releases a Beige Book survey on Wednesday
The President of the European Central Bank, Christine Lagarde, speaks in Davos on Wednesday
New York Fed President John Williams speaks on Wednesday
Unemployment in Australia, Thursday
Japanese industrial production, Thursday
The European Central Bank will publish a report on its December monetary policy meeting on Thursday
Construction begins in the USA, initial jobless claims, Thursday
Atlanta Fed President Raphael Bostic speaks Thursday
Japanese CPI, Friday
U.S. Existing Home Sales, University of Michigan Consumer Sentiment, Friday
The U.S. Congress faces a Friday deadline to pass a spending deal before part of the federal government is shut down
San Francisco Fed President Mary Daly speaks Friday
Here are some of the key moves in the markets:
Shares
S&P 500 futures were little changed at 12:36 p.m. New York time
The futures on the Dow Jones Industrial Average hardly changed
The MSCI World Index fell 0.1%
The MSCI Asia Pacific index rose 0.1%
The MSCI Emerging Markets Index fell 0.1%
The Ibovespa Brasil Sao Paulo Stock Exchange index rose 0.2% to its highest level since January 9
Mexico's S&P/BMV IPC fell 0.1%
Currencies
The Bloomberg Dollar Spot Index rose 0.2%, more than any closing gain since Jan. 9
The euro was little changed at $1.0952
The British pound fell 0.1% to $1.2734
The Japanese yen fell 0.6% to 145.71 per dollar
The offshore yuan rose 0.1% to 7.1812 per dollar
The Mexican peso fell 0.1% to 16.8935
The Brazilian real weakened 03% to 4.8695 per dollar
Cryptocurrencies
Bitcoin rose 0.4% to $42,684.57
Ether rose 0.2% to $2,531.42
Tie up
The yield on 10-year government bonds remained little changed at 3.94%
The 10-year German government bond yield rose five basis points to 2.23%
The yield on 10-year British government bonds has barely changed at 3.80%
raw materials
West Texas Intermediate crude fell 0.3% to $72.48 a barrel
Spot gold rose 0.3% to $2,056.04 an ounce
This story was produced with support from Bloomberg Automation.
– With support from Michael Msika, Tassia Sipahutar and Julien Ponthus.
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