Equity futures were relatively steady this morning as market participants reacted to hawkish comments from European Central Bank (ECB) Governor Robert Holzmann, who suggested that rate cuts might not occur this year, matching comments from Fed officials. This announcement led European stocks to hit session lows, while investors also geared up for more earnings later in the week. Stocks were closed for trading stateside in observance of Martin Luther King Jr. Day, which resulted in thin global liquidity. S&P 500 and Nasdaq 100 futures saw minor movements, down about 0.1% and unchanged respectively through noon.
Treasury cash markets were also closed, but futures indicated a slight increase in yields, around 4bps to 3.98%. The Bloomberg dollar index edged up following news that a U.S. government shutdown had been postponed until March.
The market is pausing after a recent rally, with the S&P 500 trading near its all-time high. Optimism that the Federal Reserve might start cutting interest rates as early as March has been dampened by recent inflation data showing a re-acceleration in December.
European stocks, which were hit by Holzmann’s remarks, also endured some losses following the release of new German economic data, which presented a grim outlook for corporate profits. The Stoxx Europe 600 index fell 0.3%, extending its sluggish start to the year after a 13% rise in 2023. German 10-year bond yields increased slightly, and consumer goods and carmakers led the decline in stocks.
And while poor economic data could prompt the ECB to hasten monetary easing (ie, “bad news is good news), recession fears could eventually overwrite any benefit implied by sooner-than-expected rate cuts (ie, “bad news is bad news”). US investors expect up to six quarter-point rate cuts this year from the Fed, which may be too optimistic should inflation remain stubbornly high while corporate earnings wane. Mixed earnings guidance from US banks on Friday called into question whether corporations could sustain their current trajectories.
In individual European stock movements, Dassault Aviation SA declined after reporting a drop in jet orders for 2023. Food delivery companies Delivery Hero SE and Just Eat Takeaway.com NV fell following analyst recommendations, and Volvo Car AB continued its decline due to production halts from Red Sea attack-induced shipping delays.
In Asia, the MSCI Asia Pacific share index climbed for a third session. Taiwan stocks rose following the presidential election results, while the CSI 300 Index in China fluctuated amid speculation about potential policy changes by the People’s Bank of China.
The Bloomberg Dollar Spot Index saw a modest rise, and oil prices dropped slightly, with WTI trading near $72.10. Spot gold saw a minor increase. In general, it was a quiet day for markets around the world.
US markets won’t have all that much to look forward to this week other than more major bank earnings. Fed Governor Christopher Waller, however, could steal the show tomorrow when he speaks at 11:00 am EST. Depending on what Waller says about rates, stocks could be jolted in either direction. The S&P is running right up against resistance at its all-time high, which puts bulls in a tough spot given how stocks ripped higher through the entirety of November and December last year.
Waller’s the most immediate danger, but disappointing bank guidance could spark a selloff, too. On the other hand, if banks leave traders impressed (or Waller leans dovish), stocks would probably rally. But how much higher will they go? The S&P hasn’t had a real retracement yet, and until it does, staying on the sidelines – or flipping tactically bearish – might be the better idea.
