European and global markets day ahead from Stella Qiu
A rash of rate cuts over the past few days, with big 50bp moves in Switzerland and Canada and a 25bp cut by the European Central Bank, helped turbocharge the US dollar, which jumped 1% against the euro, up 1.6%. Swiss franc and 1.8% on Japanese yen.
The dollar also got a boost from Treasury yields as investors cut expectations for an easing of aggressive US policy next year. Markets are still bullish on Fed tapering next week, but they’ve given up on a January move, priced at just 20%.
The big wild card for the market outlook — U.S. President-elect Donald Trump — will return to the Oval Office at the Fed’s next meeting and could issue dozens of executive orders with wide-ranging trade and political implications.
The dollar’s relentless strength is putting pressure on currencies in emerging markets, limiting their ability to ease policy. The Indonesian rupiah hit a four-month low on Friday and its central bank has repeatedly had to intervene to prop up the currency.
India’s central bank appears to have been selling dollars through state-owned banks to support the rupee, which is at record lows.
The yen was also a major loser, undermining expectations that the Bank of Japan is unlikely to raise interest rates next week. Smaller firms’ wage woes are another reason the BOJ may proceed cautiously with any tightening.
An additional factor weighing on US income and the dollar is that Thursday’s US PPI data was biased upward with egg prices and the base rate doing much better, with analysts revising expectations for the key PCE index to around 0.13. % from 0.2% plus.
Long-dated Treasuries suffered big losses this week, with the benchmark 10-year yield rising 17 bps and the 30-year yield rising 22 bps, the biggest weekly gain in more than a year.
Disappointing results from Thursday’s 30-year bond auction were also partly to blame, but the rise in yields largely reflected rising terminal rates. US rates fall only slowly to 3.8% by the end of 2025, compared to 1.75% for Europe and 2.7% for Canada.
In Asia, most stocks are down, with China leading the losers.
Hopes were high at China’s central economic work conference in Beijing after a Politburo meeting changed the monetary policy stance to “moderately loose”, the first such change in 14 years, but nothing concrete emerged.
Europe is lower than secondary economic data, including UK monthly GDP and Eurozone industrial production. EUROSTOXX 50 futures were 0.3% lower, while Nasdaq futures rose 0.3%, near a record high.
Several ECB officials will speak in the afternoon. The central bank, which disappointed doves hoping for a 50bp move on Thursday, is expected to cut by a quarter point at each of its policy meetings until the middle of next year.
Key events that could affect the markets on Friday:
— UK monthly GDP data
— Eurozone industrial products
— US import price data
– Mario Centeno, Governor of the Central Bank of Portugal, speaks
(By Stella Q; Editing by Edmund Claman)