Passers-by walk past an electric monitor displaying the exchange rate of the Japanese yen against the U.S. dollar outside a brokerage firm in Tokyo, Japan, October 4, 2023. Portal/Issei Kato/File Photo ACKNOWLEDGE RIGHTS
- The global stock index MSCI reaches its lowest level since March
- S&P futures rise ahead of a series of technical results
- US GDP data is expected to underline economic outperformance
LONDON/SYDNEY, Oct 23 (Portal) – Global stocks hit a seven-month low on Monday as the risk of a major conflict in the Middle East and the prospect of a long period of high interest rates dampened sentiment at the start of a full week of earnings and metrics Mega Caps.
Bonds were also under pressure as 10-year U.S. Treasury yields hovered around 5.0%, driving up global borrowing costs and testing equity valuations.
Washington warned over the weekend of a significant threat to U.S. interests in the Middle East as ally Israel bombed Gaza and clashes escalated along the border with Lebanon.
The European Central Bank and the Bank of Canada are holding policy meetings this week, and while no rate hikes are expected, investors will be sensitive to predictions about future developments.
The recent rise in bond yields has tightened monetary conditions without any action from central banks, allowing the Federal Reserve to signal that it will likely remain on hold at its policy meeting next week.
In fact, futures suggest there’s about a 70% chance the Fed will finish tightening this cycle, flirting with the possibility of rate cuts starting in May next year.
The rise in the 10-year Treasury yield toward the 5 percent mark has challenged stock valuations and dragged most major indexes lower last week, while the US stock market volatility “fear index” VIX (.VIX) hit its highest level since reached March.
The MSCI All-World Index (.MIWD00000PUS) was last down 0.1%, hitting its lowest level since late March, as the turmoil that had gripped the global banking sector eased. In Europe, the STOXX 600 (.STOXX) was roughly flat, around last week’s seven-month low.
“From an economic perspective, 5% is just another number. But as far as investors are concerned, it resonates,” said Chris Scicluna, chief economist at Daiwa Capital.
“I don’t think this is a tipping point, but it is a reminder of the record tightening we have experienced, and it is a reminder to the Fed that it cannot be entirely sure how strong that tightening will be. “What has already been transferred to the real economy and how much more is to come,” he said.
MSCI’s broadest index of Asia-Pacific stocks outside Japan (.MIAPJ0000PUS) slipped 0.5% to its lowest level in almost a year.
The yield on the benchmark 10-year U.S. bond is heading for its biggest half-year gain since mid-1994, up 152 basis points since the end of April. It most recently rose 5 basis points to 4.969%.
Mega-caps Microsoft (MSFT.O), Alphabet (GOOGL.O), Amazon (AMZN.O) and Meta Platforms (META.O) are all reporting profits this week. IBM (IBM.N) and Intel (INTC.O) are also on the program.
US index futures were last up 0.1%.
Growth spurt
Profits should be supported by strength in consumer demand. U.S. gross domestic product numbers this week are expected to show third-quarter annual growth of a respectable 4.2% and nominal annual growth of possibly up to 7%.
“At the same time, the modest increase in hours worked last quarter suggests strong productivity growth and a rise in corporate profits,” JPMorgan chief economist Bruce Kasman wrote in a note.
“As corporate and household incomes benefit from this nominal burst of activity, the underlying resilience of the U.S. private sector is strengthened.”
This US outperformance has supported the dollar, although the threat of Japanese intervention has limited it to around 150.00 yen, at least for now. The dollar was last trading at 149.93 yen, just below a recent peak of 150.16.
Yields also rose in Japan on speculation that the Bank of Japan is discussing further tweaks to its yield curve control policy, which may be announced at its monetary policy meeting on October 31.
The euro fell 0.1% to $1.0577, while the Swiss franc was steady at 0.8928 per dollar, having benefited from safe-haven inflows in recent weeks.
The ECB meets later this week and is expected to keep interest rates unchanged at 4%. Investors will be waiting for any sort of signal from ECB President Christine Lagarde about how the recent rise in global bond yields could affect the euro zone’s monetary policy outlook.
“Given the further rise in yields we have seen recently and the geopolitical events since the last session, I think we want to wait and see what her tone is and whether she still has a more hawkish bias at the margin.” “Said Scicluna from Daiwa.
Gold prices, which hit their highest since May last week thanks to safe-haven inflows, fell 0.3% to $1,975 an ounce.
Oil prices fell slightly as there was no immediate risk of disruption to supplies from the Middle East
Brent crude fell 1% to $91.28 a barrel, while U.S. crude fell 1.2% to $87.04.
Reporting by Wayne Cole; Edited by Shri Navaratnam, Simon Cameron-Moore and Susan Fenton
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