Stocks plunge with eyes on rate hikes; bonds decline

Bloomberg

Shares in Europe declined on Monday along with US equity futures as a note of caution crept in at the start of a week marked by interest-rate decisions and big-name company earnings on both sides of the Atlantic.
The Stoxx Europe 600 index dropped about 0.6%, taking some of the luster off what was shaping to be the biggest January gain on record, after data showed a surprise contraction of the German economy in the fourth quarter. Technology stocks led the decline as Prosus NV slumped more than 5% after a rout in Hong Kong’s tech sector.
European bonds fell, with yields on benchmark German securities up six basis points, after Spanish inflation unexpectedly quickened, prompting traders to boost bets on how high the European Central Bank (ECB) will raise interest rates. The euro gained.
Contracts on the S&P 500 and Nasdaq 100 declined. Wall Street advanced on Friday as traders brushed off disappointing outlooks from some of the world’s largest technology companies to push the Nasdaq 100 up 1%, heading for its best start to the year since 1999.
Federal Reserve officials are expected to raise rates by a quarter percentage point, dialling back the size of the increase for a second straight meeting, after recent data suggested the central bank’s aggressive campaign to slow inflation is working. Signs of earnings pressure, however, are raising concerns about the health of the economy and the outlook for equities.
“For the next step of the rally I think we need more and that will really be to prove not only that we are not having a profound earnings recession, but also that companies can remain robust through this challenging period,” said Marcus Morris-Eyton, portfolio manager at Allianz Global Investors, on Bloomberg TV. “I would urge investors to be selective, but generally we are relatively bullish on where we are currently.”
Asian benchmarks were mixed. Indian shares underperformed as the rout in Adani Group stocks swelled to $71 billion amid a fight with short seller Hindenburg Research. The Shanghai Shenzhen CSI 300 Index slid from intraday highs, coming in just short of entering a bull market as onshore exchanges resumed after the week-long Lunar New Year holiday.
By midweek central banks are likely to dominate the agenda, beginning on Wednesday with the Fed, which is expected to downshift to a 25 basis points increase in interest rates amid signs of cooling inflation.
A report showed the Fed’s preferred inflation measures eased in December to the slowest annual pace in over a year and spending fell. Separate data from the University of Michigan showed US inflation expectations continued to retreat in late January, helping boost
consumer sentiment.
The ECB and the Bank of England are each projected to hike by half a percentage point when they deliver decisions a day after the Fed.
Elsewhere in markets, a gauge of dollar strength slipped, and Treasury yields gain.
Meanwhile, hedge funds are betting this year’s stellar start for Treasuries is too good to last, quietly building up the biggest bearish bet on bond
futures on record.
An aggregate measure of net-short non-commercial positions across all Treasuries maturities has hit 2.4 million contracts, according to the latest data from the Commodity Futures Trading Commission as of January 24.
The Stoxx Europe 600 drops 0.6% as of 10:11 am London time and S&P 500 futures fell by about 0.9%.
While Nasdaq 100 futures fell 1.3%, futures on the Dow Jones Industrial Average fell 0.6% and the MSCI Asia Pacific Index fell 0.4%. The MSCI Emerging Markets Index fell as much as 0.6%.
The Bloomberg Dollar Spot Index fell 0.1% and the euro rose 0.3% to $1.0906.
While the Japanese yen was little changed at 129.95 per dollar, the offshore yuan was little changed at 6.7532 per dollar and the British pound rose 0.1% to $1.2398.