Dollar posts big gains, U.S. stocks buck global rally

  • Global stocks rise slightly, but Wall Street falls
  • The correlation with the dollar is softening
  • The yen takes a breather after the recent rally

LONDON/NEW YORK, Jan 3 (Reuters) – The dollar headed for its biggest one-day rise in more than three months on Tuesday as U.S. stocks bucked a rally in global equities during a busy week in macro that could offer some direction on when, and where, US interest rates could peak.

The MSCI All World Index (.MIWD00000PUS) fell 0.15%, led by declines in US equities, while European equities hit two-week highs, led by strong gains in everything from financials to oil and gas stocks to by health care.

The Dow Jones Industrial Average (.DJI) lost 0.1% in early trading, the S&P 500 (.SPX) slipped 0.3% and the Nasdaq Composite (.IXIC) lost 0.6%.

The dollar index was last up 0.7% at 104.42.

The euro was the worst performing currency against the dollar, falling the most since late September, after German regional inflation data showed consumer price pressures eased sharply in December, largely due to government measures to contain household and business natural gas bills. .

US payrolls data this week is expected to show the labor market remains tight, while EU consumer prices could show some slowing in inflation as oil prices fall. energy.

“Energy base effects will lead to a major reduction in inflation in major economies in 2023, but stickiness in the basic components, largely due to tight labor markets, will prevent an early ‘pivot’ of accommodative policy. central banks,” NatWest Markets analysts wrote in a note.

They expect interest rates to top out at 5% in the US, 2.25% in the EU and 4.5% in Britain and stay there all year. Markets, on the other hand, are pricing in rate cuts for the end of 2023, with fed funds futures implying a range of 4.25% to 4.5% by December.

“What makes me nervous this year is that we still don’t know the full impact of the very significant monetary tightening that has taken place in the advanced world,” said Berenberg senior economist Kallum Pickering.

“It takes a good year, or 18 months, for the full effect to be felt,” he said.

Central banks have expressed concern over rising wages, even as consumers struggle to keep up with soaring costs of living and businesses run out of room to protect profitability by raising their own prices.

But, Pickering said, the labor market tends to lag the economy as a whole, which means there’s a risk that central banks will raise interest rates more than expected. economy can bear.

“What central banks are inducing is essentially excessive cyclicality, i.e. they overstimulated in 2021 and triggered an inflationary boom, then overtightened in 2022 and triggered an inflationary boom. disinflationary recession. This is the exact opposite of what you want central banks to do,” he said. .

Investors will get their first glimpse of the central bank’s thinking later this week when the Federal Reserve releases minutes from its December policy meeting.

Minutes will likely show that many members saw risks that interest rates were expected to rise for longer, but investors are aware of how much they have already risen.

In the markets, European equities rose on gains in traditional defensive sectors, such as healthcare and food & beverage. Drug makers Novo Nordisk (NOVOB.CO)Astrazeneca (AZN.L) and Rock (ROG.S) were among the largest positive weightings in the STOXX 600 (.STOXX)with Nestle (NESN.S)

The STOXX, which lost 13% in 2022, rose 1.3%. The FTSE100 (.FTSE)the only major European index not to trade on Monday, rose 1.4%.

Markets have for some time priced in a possible easing in the United States, but were caught off guard by the Bank of Japan’s upward shock to its ceiling for bond yields.

The BOJ now plans to raise its inflation forecast in January to show price growth close to its 2% target for fiscal 2023 and 2024, according to the Nikkei.

Such a move at its next policy meeting on Jan. 17-18 would only add to speculation about an end to ultra-loose policy, which has essentially served as a floor for bond yields globally.

The policy shift boosted the yen across the board, with the dollar losing 5% in December and the euro 2.3%.

The yen paused on Tuesday, losing 0.36% against the dollar at 130.765. The dollar earlier hit a six-month low at 129.52 yen. Against the dollar, the euro fell 0.9% to $1.05690, after falling 1.4% earlier in the day.

“A theme we have often noticed is the negative seasonality of the euro in January, down about 1.3% since 1980 on average in January, with a success rate of 64%. If the story is a guide, it’s a tough month for euro buyers,” Nomura said. said strategist Jordan Rochester.

Oil succumbed to dollar strength and reversed course, falling as concerns over demand in China, the world’s second-largest economy, added to the downward momentum.

A series of surveys have shown Chinese factory activity has shrunk at the fastest pace in nearly three years as COVID infections swept through production lines.

“China is entering the most dangerous weeks of the pandemic,” analysts at Capital Economics warned.

Brent crude fell 2% to trade around $84.22 a barrel, after hitting a session high of $87.00 earlier.

Reporting by Wayne Cole; Editing by Bradley Perrett, Sam Holmes, Chizu Nomiyama and Andrea Ricci

Our standards: The Thomson Reuters Trust Principles.

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