Stocks, Bonds Fall as Traders Weigh Policy Outlook: Markets Wrap

(Bloomberg) — European stocks fell along with bonds as traders weighed the outlook for monetary policy ahead of a raft of speeches by policy makers at the World Economic Forum in Davos this week.

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The Stoxx Europe 600 index dropped 0.3%, with banks and carmakers leading the decline after data showed Germany’s economy contracted for the first time since the pandemic last year. Germany’s 10-year yield rose about four basis points. Among individual stock moves, Dassault Aviation SA slumped as much as 10% after the French aircraft maker reported a decline in 2023 jet orders. Grifols SA climbed more than 7% after the Spanish medical-technology company sought to dispel investors’ concerns over the completion of a deal in China.

European Central Bank Chief Economist Philip Lane said in an interview published at the weekend that easing policy too early would be “self-defeating,” damping expectations of rapid rate cuts. Traders are still betting on 149 basis points of reductions this year, compared to 153 on Friday. ECB Governing Council member Robert Holtzmann may add to the picture when he speaks at Davos later today.

“We expect further push-back against the current market pricing of rate cut expectations,” economists at Rand Merchant Bank in Johannesburg wrote in a note. “Ultimately, however, the market is likely to be steadfast in its view of aggressive policy easing to come during this year.”

US equity-index futures were flat, with cash stock and Treasury markets closed on Monday for a public holiday. A gauge of the dollar was little changed. The MSCI Asia Pacific share index climbed for a third session after a surprise decline in US producer prices Friday reinforced bets the Federal Reserve will lower borrowing costs in coming months.

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Japanese stocks rose after both the Topix and the Nikkei 225 indexes climbed to 34-year highs last week amid inflows from overseas investors. Stocks also advanced in Taiwan after the Democratic Progressive Party won the presidential election and the more China-friendly Kuomintang gained too few seats to control the assembly.

China’s CSI 300 Index swung between gains and losses amid speculation officials may lower the required reserve ratio after the People’s Bank of China unexpectedly left the rate on its one-year policy loans at 2.5% Monday. That was contrary to expectations among economists that it would trim the so-called medium-term lending facility by 10 basis points.

“Rate cuts are likely still on the cards, but China looks to be taking a more measured approach to policy easing,” said Marvin Chen, an analyst at Bloomberg Intelligence in Hong Kong.

Along with more US earnings reports, investors this week will be focused on inflation readings in Germany and the UK, as well as a swath of political leaders and officials including Chinese Premier Li Qiang attending the annual WEF at Davos, Switzerland. A speech by Federal Reserve Governor Christopher Waller, after officials last week attempted to temper any expectation of a looming rate cut, will also be closely watched.

In commodities, oil was steady as the risk that airstrikes by the US and allies against the Houthis would ignite a wider conflict and disrupt crude flows from the Middle East was balanced by soft fundamentals.

Some key events in markets this week:

• World Economic Forum in Davos begins, with this year’s theme “Rebuilding Trust,” Monday

• Eurozone industrial production, Monday

• Eurozone finance ministers meet in Brussels, Monday

• Iowa Republican caucuses, the first nominating contests for the 2024 US presidential election, Monday

• Japan PPI, Tuesday

• Germany CPI, ZEW survey expectations, Tuesday

• UK unemployment, Tuesday

• US Empire Manufacturing, Tuesday

• Goldman Sachs Group Inc., Morgan Stanley to report earnings, Tuesday

• Federal Reserve Governor Christopher Waller speaks, Tuesday

• China GDP, property prices, retail sales and industrial production, Wednesday

• Eurozone CPI, Wednesday

• UK CPI, Wednesday

• US retail sales, industrial production, business inventories, Wednesday

• Federal Reserve issues Beige Book survey, Wednesday

• European Central Bank President Christine Lagarde speaks at Davos, Wednesday

• New York Fed President John Williams speaks, Wednesday

• Australia unemployment, Thursday

• Japan industrial production, Thursday

• European Central Bank publishes account of December policy meeting, Thursday

• US housing starts, initial jobless claims, Thursday

• Atlanta Fed President Raphael Bostic speaks, Thursday

• Japan CPI, Friday

• US existing home sales, University of Michigan consumer sentiment, Friday

• US Congress faces deadline to pass spending agreement before part of federal government shuts down, Friday

• San Francisco Fed President Mary Daly speaks, Friday

Here are some of the main moves in markets:

Stocks

• The Stoxx Europe 600 fell 0.3% as of 9:11 a.m. London time

• S&P 500 futures fell 0.1%

• Nasdaq 100 futures were little changed

• Futures on the Dow Jones Industrial Average fell 0.2%

• The MSCI Asia Pacific Index rose 0.1%

• The MSCI Emerging Markets Index was little changed

Currencies

• The Bloomberg Dollar Spot Index was little changed

• The euro was little changed at $1.0954

• The Japanese yen fell 0.4% to 145.52 per dollar

• The offshore yuan was little changed at 7.1898 per dollar

• The British pound fell 0.1% to $1.2738

Cryptocurrencies

• Bitcoin rose 0.2% to $42,608.01

• Ether fell 0.7% to $2,508.84

Bonds

• The yield on 10-year Treasuries was little changed at 3.94%

• Germany’s 10-year yield advanced four basis points to 2.22%

• Britain’s 10-year yield advanced one basis point to 3.81%

Commodities

• Brent crude fell 0.3% to $78.07 a barrel

• Spot gold rose 0.4% to $2,056.55 an ounce

This story was produced with the assistance of Bloomberg Automation.

–With assistance from Michael Msika and Tassia Sipahutar.

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