Global equities buoyant at two-year highs

London — Global stocks traded at two-year highs and the dollar edged firmer on Tuesday before a Federal Reserve meeting, while Asian equities took a knock from the court-ordered liquidation of Chinese property giant Evergrande.

US treasuries benefited from a flurry of buying, pushing yields lower, and that kept the dollar in a tight range, after the treasury department said it would need to borrow less than it previously thought.

The MSCI All-World index was narrowly in positive territory at its highest since January 2022.

But markets are edgy as tension escalates in the Middle East, keeping oil above $80 a barrel, while investors ponder how the Evergrande Group court order might affect China’s fragile property market.

Chinese stocks are heading for a 4% drop this month, having hit their lowest in four years, and Chinese government bond yields are at two-decade lows as investors hold out for the possibility of government stimulus to bolster the world’s second-biggest economy.

This week’s other risk events include Fed and Bank of England decisions on interest rates, monthly US employment data and multiple earnings, in particular from Apple, Microsoft and Google parent Alphabet. US futures were down 0.1%

“Markets now have a sense of paralysis. They obviously want to see what the Fed is going to say this week … and how much more is the door going to be opened to rate cuts,” said Marc Ostwald, chief global economist at ADM Investor Services.

“To my way of thinking, the key thing at the moment — and this is where markets are also struggling — is we’re looking at a rate-cut cycle, but central banks and markets are looking at it in terms of a normal economic cycle.”

Ostwald added that in the past 15 years, since the sub-prime crisis, all rate-cutting cycles had been triggered by some form of financial instability, rather than an economic cycle.

“We actually haven’t had a normal rate-cutting cycle in response to a change in demand and changes in the labour market for a very long time, so that’s why I partly think there is so much divergence in opinions,” he said.

The Fed in December surprised markets with a dovish tilt, projecting 75 basis points of interest rate cuts in 2024, sparking a blistering year-end risk rally.

But a flurry of strong economic data, sticky inflation and caution from central bankers have made markets reassess their expectations.

Markets expect a 47% chance of a Fed rate cut in March, the CME FedWatch Tool shows, down from 88% a month earlier. They now anticipate 134 bps of cuts in the year, compared with 160 bps of easing a month ago.

Hearty risk appetite

Overnight, the S&P 500 logged another record-high close and that optimism fed into equity markets in Europe, where the benchmark Stoxx 600 was up 0.4%, having traded at two-year peaks.

The dollar edged up against a basket of currencies, gaining 0.1% and leaving the euro 0.1% weaker at $1.0818. But gains were tempered by a rally in treasury prices that pushed the yield on the benchmark 10-year note down 4 bps to 4.055%.

The yuan, which is set for its worst monthly performance against the dollar since August, was flat at ¥7.1879/$.

Investors are holding out for more measures from Beijing to defend equity markets after a cut to bank reserves last week. BlackRock Investment Institute said in a weekly note they hold a neutral stance on Chinese assets.

“We see growth on a weaker trajectory and see only limited policy stimulus from China,” they said.

The oil price held firm, after the US said it would take “all necessary actions” to defend American forces after a drone attack killed three US troops in Jordan.

Reuters