Author: Alan John and Stella Chiu
LONDON/SYDNEY (Reuters) – World stocks held near record highs on Tuesday and the dollar fell as investors awaited inflation data on both sides of the Atlantic due later this week.
Traders are keeping a close eye on shortened settlement times for U.S. trades, but there have been few major moves ahead of the opening of U.S. markets.
Investors in U.S. stocks and other securities must settle trades one business day after the trade was made, instead of the two business days starting Tuesday.
Most asset classes outside of commodities have been trading in fairly tight ranges in recent weeks, with major equity benchmarks near record highs, European bond yields edging higher and the dollar gradually weakening against major currencies.
This week’s U.S. personal consumption expenditures (PCE) inflation data and consumer price index (CPI) inflation data from major euro zone economies may affect expectations of when major central banks will start cutting interest rates, thus shaking the market’s current thinking. Eurozone inflation data will be released on Wednesday, followed by personal consumption expenditure data on Friday.
“If you want big moves, you have to get rid of the idea in the market’s mind that the next move for the U.S. is to raise interest rates,” said Kit Juckes, chief currency strategist at Societe Generale.
While he was referring to the U.S. dollar, there are currently many correlations between assets.
“We were bombarded with stronger-than-expected U.S. data at the end of the first quarter, but that all went away and we were in no man’s land,” Jewkes said.
The market has fully priced in the Federal Reserve to cut interest rates by 25 basis points this year, most likely in September or November. They see about a one-in-three chance of a second 25 basis point rate cut by the end of the year.
In the euro zone, the European Central Bank is almost certain to cut interest rates at its meeting next month, although markets have only fully priced in the possibility of further cuts until December.
Intriguingly for policymakers, euro zone consumers lowered their inflation expectations last month, a new ECB survey showed on Tuesday.
The MSCI global stock index was flat on the day, with European stock markets generally down 0.25%, both close to record highs set this month. Earlier in the day, Asian stocks were largely stable, with U.S. stocks up 0.14%.
Emerging markets are also in focus, with Zambia’s finance ministry saying more than 90% of holders of its $3 billion in outstanding international bonds have so far accepted its restructuring proposals, putting the country on track to emerge from a long-term default.
Follow Japan
Elsewhere, data on Tuesday showed that the Bank of Japan’s key indicators of basic inflation fell below the 2% target in April for the first time since August 2022, adding to the uncertainty about the timing of the central bank’s next interest rate hike.
But investors appeared to be paying more attention to comments made by Bank of Japan Deputy Governor Nobuyuki Uchida on Monday, who said Japan’s fight against persistent deflation was coming to an end. Japan’s 10-year government bond yield rose to 1.035% on Tuesday, the highest level since April 2012. [JP/]
That helped the yen firm to 156.7 against the dollar, although it weakened to its lowest levels in years against the pound and Australian dollar.
The euro was last up 0.2% at $1.0882 against the dollar. [FRX/]
The cash Treasury market is recovering from the holidays, with prices recovering slightly after taking a beating last week.
The two-year yield fell 3 basis points to 4.922%, after surging 13 basis points the previous week, while the 10-year yield fell 1 basis point to 4.457% after rising 5 basis points the previous week.
Oil prices extended gains from the previous session. Futures rose slightly to $83.23 a barrel. July futures were trading at $79.13 a barrel, up 1.4% from Friday’s close. The futures traded during the U.S. Memorial Day holiday but did not settle. [O/R]
It was unchanged at $2,350.3 an ounce.
