European Shares Climb as Rate Cut Bets Strengthen

European stocks rose firmly on Friday as the latest signs of slowing economic growth reinforced expectations that central banks will start slashing interest rates in 2023.

The region-wide Stoxx 600 index jumped 0.7% in morning trading, heading for a gain of over 2% this week. Bond yields slid further as markets now fully price in 100 basis points of European Central Bank rate cuts next year.

This shift comes after soft US inflation and jobs data this week fueled conviction that the aggressive tightening campaigns by the Federal Reserve and other major central banks are nearing their end.

According to Bank of America, investors poured $23.5 billion into global equities in the week through November 15, marking the second-largest inflows this year. This suggests the prospect of less brutal rate hikes outweighs concerns about their potential damage to growth.

However, there are growing signs the hikes are starting to bite. Oil prices plunged over 20% from September peaks into a bear market, with WTI crude trading around $73 per barrel, putting it on track for a fourth straight weekly decline.

“At some point, investors will react negatively to what increasingly looks like a recession,” said Melissa Brown of Qontigo GmbH.

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“We’ll get rate cuts, but weakening earnings and lower consumer spending won’t initially be good for markets.”

Pound Sinks as UK Retail Sales Unexpectedly Drop

In the UK, the pound slid 0.2% to $1.2393 while gilt yields fell up to 10 basis points after data showed retail sales volumes surprisingly decreased 0.6% month-over-month in October.

This defied economist forecasts of a 0.3% increase and adds to indications the UK economy is entering recession.

“This is a clearly weak report that puts the economy on track for a fourth quarter contraction,” said ING’s James Smith. “With UK inflation still way above target, today’s data likely won’t prevent more Bank of England rate hikes.”

Asian Markets Undermined by Weak China Figures

In Asia, stocks came under pressure following Chinese retail sales and industrial output figures for October that widely missed economist estimates.

The MSCI Asia Pacific index traded flat while China’s CSI 300 index dropped 1.1%.

Alibaba Group plunged over 10% after the e-commerce titan halted plans to list its $11 billion cloud computing unit, depriving investors of an important milestone.

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However, China’s central bank moved to ease liquidity strains after last month’s surprise cash crunch.

The People’s Bank of China instructed major state lenders to cap interbank funding rates, sources said. This aligned with a sizeable cash injection to stabilize conditions.

Upbeat Mood on Prospects of Less Hawkish Fed

The overall sentiment in global markets remains geared toward future rate cuts instead of current economic sluggishness.

US stock futures pointed to a positive open on Wall Street, with S&P 500 contracts rising 0.2% and Nasdaq 100 futures little changed.

If gains hold, the S&P 500 could post its strongest week since June while the Nasdaq 100 eyes its largest weekly jump since March.

Treasury yields extended their decline, with the 10-year rate shedding 4 basis points to around 4.39%. Sliding yields signal growing belief the Fed will slow the pace of hikes next month.

Milder recent inflation numbers have fueled speculation the US central bank may stop short of policymakers’ projections for a peak rate surpassing 5% in 2023.

Earnings Recession Looms as Hikes Impact Economy

Beneath the optimism lurks unease over corporate profits as steeper borrowing costs threaten to push major economies into recession.

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The Citi U.S. Economic Surprise Index has plunged to its lowest level since July 2020, signaling the world’s biggest economy is losing steam.

JPMorgan’s Jamie Dimon said this week the U.S. likely faces a mild or “harder” recession next year. His comments echoed similar warnings from Deutsche Bank and Goldman Sachs.

Per Refinitiv data, S&P 500 earnings growth is expected to hit -1.6% in Q1 2023 before recovering.

Key Events to Monitor

Looking ahead, traders will closely watch U.S. housing starts data Friday along with Fed official remarks for rate hike clues.

Next week’s Fed November meeting minutes will also be scrutinized for views on recent inflation trends.

In Europe, ECB President Lagarde speaks Friday while eurozone PMIs next week should indicate whether the bloc is entering recession.

Overall, markets appear focused on policy and data for signs of additional tightening required.

While less aggressive hikes has fueled hopes of a soft landing, major uncertainties remain around inflation and the impact on growth.

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