Stocks, bonds decline after rally stalls before year-end

BLOOMBERG

European stocks slipped, following losses in the US and Asia as traders dial back optimism over possible Federal Reserve interest-rate cuts and trim positions before the long Christmas weekend.
The autos and real estate sectors led declines as Europe’s Stoxx 600 index retreated 0.3%. The S&P 500 and Nasdaq 100 both dropped 1.5% Wednesday, although futures contracts pointed to a recovery of some of those losses on Wall Street later. Treasuries edged lower, while most currencies traded in narrow ranges with volatility easing as the year-end holiday season approaches. “The dovish tone by the Fed in December has been grossly over-exaggerated in terms of its impact on asset prices,” Mark Konyn, chief investment officer at AIA Co in Hong Kong, said on Bloomberg Television. “The market will be little disappointed in terms of when those cuts start to take effect.”
Risk assets are taking a breather after this month’s rally that saw global stocks climb to their highest level in 2023. Overbought conditions in the US have also contributed to the selling as gauges of relative strength rose to levels that in the past have accurately predicted declines.
The MSCI All Country World Index of shares slipped for a second day after it had powered ahead for the previous nine sessions. Japanese stocks were among the biggest losers in Asia led by a selloff in index heavyweight Toyota Motor Corp. The technology-heavy markets of South Korea and Taiwan also dropped.
Mainland China shares bucked the trend, posting their best day since early November after data showed signs of recovery in the country’s ailing property market. Chinese equities appeared to shrug off a Wall Street Journal report, which said the Biden administration is discussing raising tariffs on some China goods, citing people familiar with the matter. The dollar weakened against almost all its Group-of-10 peers after US 10-year yields dropped to a five-month low, amid the outlook for lower Fed interest rates.
Toyota Slumps
Toyota Motor shares slumped after subsidiary Daihatsu Motor Co’s offices were raided over a safety scandal and the automaker recalled 1 million cars in the US. The raid followed revelations the carmaker and supplier manipulated the results of collision safety tests dating as far back as 1989. While US stocks are at risk of dropping as the rally shows signs of fatigue, investors should buy into these pullbacks, according to Citigroup Inc. strategists. The team including Scott Chronert expects “consistent” sector-level earnings growth and a broadening of the rally beyond mega-cap technology stocks. Chronert said soft landing sentiment and optimism about lower interest rates helped drive the market action into the year end. “The implication is to expect volatility ahead, but with an eventual Fed pivot as a north star,” he said. Amundi expects the currency to fall as low as $1.21 in the first quarter, compared to this month’s high of near $1.28 and analyst forecasts of $1.25 by end-March, according to a Bloomberg poll.