US rate cut euphoria fades, pushing global shares down again

London — Global stock markets extended a New Year slide on Wednesday, while the dollar held firm, as market optimism about early US interest rate cuts ebbed and the latest escalation of hostilities in the Middle East weighed on sentiment.

MSCI’s broad index of world equities slipped 0.3% to its lowest level in almost two weeks, while US stock futures pointed to a weak opening for Wall Street.

In a further sign that recent blistering gains for stocks and bonds were faltering, US Treasury yields rose while European shares fell 0.7% and Asia Pacific shares outside Japan shed more than 1%.

Caution was rising ahead of the release of minutes from the US Federal Reserve’s (Fed’s) December meeting, due at 1900 GMT on Wednesday, as well as a slew of important US data this week.

Fed officials in December predicted 75 basis points (bps) of rate cuts in 2024, driving money market bets for about double that amount of cuts that prompted a cross-market year-end rally.

“We had that whacking great rally at the end of last year when markets convinced themselves there would be a soft [economic] landing, cooling inflation and a rapid pivot to rate cuts,” AJ Bell investment director Russ Mould said. “But if you get an unexpected hard landing or an inflationary boom, you might get a slightly different script, so I guess people are now pausing for reflection.”

Futures markets still see a 70% chance of the Fed starting to lower US borrowing costs from their current 22-year high from March. But Reuters analysis of Fed policymakers’ recent comments shows that, while many of them have noted improvements in inflation and some easing of wage pressures, most have not said monetary easing is urgent.

US data this week should clarify the outlook, with ISM’s manufacturing survey, due later on Wednesday, set to show whether the central bank has new recession signals to worry about. The market-moving US nonfarm payrolls report is due on Friday.

Souring tensions in the Middle East also undermined market sentiment.

Hamas deputy leader Saleh al-Arouri was killed on Tuesday in an Israeli drone strike in Lebanon’s capital Beirut, Lebanese and Palestinian security sources said, raising the risk of war in Gaza spreading well beyond the Palestinian enclave. Israel has neither confirmed nor denied that it killed Arouri.

Denmark’s Maersk and German rival Hapag-Lloyd said on Tuesday their container ships will continue to avoid the Red Sea after a series of attacks on vessels blamed on Houthi militants.

“Supply curves of commodities, inputs, intermediates and final goods remain much more volatile than one would like. Furthermore, Western labour markets will remain structurally tight,” Rabobank said in a note.

Futures markets tipped Wall Street’s S&P 500 index to open lower on Wednesday. The index came within striking distance of its all-time closing high last week as investors priced in aggressive rate cuts for 2024.

Shares of rate-sensitive megacap stocks including Nvidia , Apple and Tesla fell marginally in premarket trading. Apple shares hit a seven-week low on Tuesday after Barclays downgraded its shares.

“I don’t think the last two days marks a trend shift but a pullback in what’s likely to be a good start to the year for equities,” said Tim Graf, head of macro strategy for Europe, the Middle East and Africa, at State Street Global Markets in London.

US Treasury yields, meanwhile, continued to edge higher. The benchmark 10-year yield, a barometer of expected long-term borrowing costs, was last up 3 basis points at 3.97%. It briefly popped above 4% on Tuesday.

Germany’s 10-year Bund yield was steady at about 2%, while Britain’s 10-year gilt yield was a touch higher at 3.65%.

The dollar index touched a fresh two-week high at 102.49 as rate cut bets eased and was last up about a quarter of a percent. The dollar gained 0.6% to 142.83 yen, while the euro slipped about a fifth of a percent to $1.0919.

Brent crude oil futures were flat at $75.88 a barrel as expectations of ample supply outweighed concerns about disruptions to Red Sea shipping routes for now.

Spot gold slipped 0.5% to at $2,048 an ounce.