Summary: Global stock markets and currency exchange rates faced turbulence on Tuesday due to hawkish remarks from central bankers, leading to a decrease in expectations for interest rate cuts. Asian shares dropped to a one-month low, while US stock futures fell and the dollar rose. The MSCI’s broadest index of Asia-Pacific shares outside Japan fell 1%, with Japan’s Nikkei also experiencing a dip. S&P 500 futures were lower, reflecting a cooling in interest rate cut expectations. Short-term Treasury yields rose, and the risk-sensitive Australian and New Zealand dollars were pushed down by increasing two-year yields and a stronger dollar.
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Central banks’ remarks regarding interest rate cuts have contributed to turbulence in global markets. On Tuesday, Asian stock markets experienced a significant decline, with the MSCI’s broadest index of Asia-Pacific shares outside Japan falling to its lowest level in a month. Similarly, Japan’s Nikkei saw a 0.7% dip, snapping a six-session winning streak.
The impact of central bank comments was also felt in the US market, as S&P 500 futures fell during Asian trade. This decline reflected a decrease in expectations for interest rate cuts. Additionally, short-term Treasury yields rose while Fed fund futures exhibited cooling expectations for rate cuts.
The risk-sensitive Australian and New Zealand dollars were impacted by the rising two-year yields, causing both currencies to drop by 0.6%. Specifically, the Australian dollar fell below its 50-day moving average to $0.6620, while the New Zealand dollar declined to $0.6161.
European bonds faced a sell-off on Monday after officials from the European Central Bank pushed back on market speculations of rate cuts. Both Bundesbank President Joachim Nagel and Austrian central bank governor Robert Holzmann cautioned against expecting rate cuts. As a result, money markets scaled back the implied probability of a 25 basis points ECB cut in March.
The impact of these developments extended to the currency market, with the euro being pushed lower by a stronger dollar. The euro decreased by approximately 0.3% to reach a one-week trough against the greenback at $1.0918. Simultaneously, the dollar rose to one-month highs against the risk-sensitive Australian and New Zealand dollars.
This volatility in global markets is also influenced by political factors, with the recent capturing of the first 2024 Republican presidential contest in Iowa by Donald Trump. The influence of Trump’s candidacy on market volatility is expected to be ongoing.
Furthermore, market participants are keenly awaiting Federal Reserve Board Governor Christopher Waller’s speech on the economic outlook, which could impact market expectations for interest rate cuts. Waller’s shift to a more hawkish stance in November had previously led to a rally in US equities. Consequently, market participants are hopeful that Waller’s speech will provide valuable insights into the Fed’s policy direction.
Gold prices remained stable at $2,052 an ounce, retaining gains from the previous week. In the commodities market, iron ore prices fell to over five-week lows in Singapore, impacting share prices for Australia-listed miners. Additionally, a US-owned and operated dry bulk ship was struck by an anti-ship ballistic missile from Houthi forces in Yemen.
In the realm of economic data, Australian consumer sentiment worsened in January due to concerns over higher mortgage rates. Meanwhile, Japan’s wholesale inflation remained flat in December compared to the previous year, alleviating pressure on the Bank of Japan to raise interest rates.
Overall, global markets are experiencing uncertainty and increased volatility as market participants react to central bank comments and political developments. Traders are closely monitoring key speeches and economic indicators to gain insights into future market movements.