(Reuters) – Watch from Mike Dolan on the upcoming day in the US and international markets
Wall Street’s S&P 500 index erased all of its post-election gains, weighed on bond markets by inflation and interest rate fears if the tepid economy is hampered by the incoming administration of President-elect Donald Trump.
In the fourth quarter of corporate earnings from Wednesday, the S&P 500 posted another 2% loss for the week and closed less than 1% lower than Friday’s Nov. 5 election day close.
With bond yields and the dollar still falling early Monday, S&P500 futures fell 1% from the bell and the VIX ‘fear index’ rose by 22 for the first time this year – and is set to rebound on Election Day.
The new cloud over the market in the new year was based on good news and another impressive US employment report, in which wage growth exceeded forecasts and the unemployment rate fell. This makes it clear that any Federal Reserve concerns about a soft labor market are widespread.
If the equity side is maintaining or tightening, the Fed — and the Treasury bond market — must still assess the risk of a re-acceleration of above-target inflation.
That’s especially the case as Trump plans to deport illegal immigrants and tax cuts and tariff hikes that are expected to worsen the broader picture of wages and prices and increase public debt concerns.
The main moment
Trump’s inauguration next week is now a critical market moment, according to Treasury Secretary Scott Bessant during his Senate confirmation hearing this Thursday.
But we got a firm reality check on inflation with the release of the December price report on Wednesday, which will feed into Monday’s New York Fed survey of consumer inflation expectations.
Without even a single Fed rate cut in futures markets all year, the interest rate market is now toying with the idea that the Fed’s easing cycle is over after a 1 percent cut. Chances that rates will bounce back from here.
The Treasury market has been running on fears for more than a month, with the 10-year yield rising by early Monday to 4.8% from the end of 2023 — more than 40bps above the federal policy rate.
The 10-year yield is now up 115 basis points since the Fed began tapering in September.
Two-year yields rose 4.4% for the first time since July.
The dollar index continues to build a head of steam as a result, hitting its highest level since early 2022 on Monday.
Further weighing on the price picture is a rebound in U.S. crude oil prices, which hit their highest since August on Monday and have posted their biggest year-to-date gain of 8 percent since July.
The latest push comes as broader US sanctions are expected to affect Russian crude supplies to the world’s top and third-largest importers, China and India.
Sanctions
The US Treasury on Friday imposed sanctions on Russian oil producers Gazprom Neft and Surgutneftegas, as well as 183 vessels carrying Russian oil, targeting revenue used by Moscow to fund its war with Ukraine.
Analysts expect Russian oil exports to be hit hard by the new sanctions, which will push top buyers China and India to buy more oil from the Middle East, Africa and the US, driving up prices and shipping costs.
The Indian rupee was on the upswing on Monday, posting its biggest one-day decline in two years to another record low as the dollar strengthened globally and perhaps reflected some crude oil curbs.
Shares in China and Hong Kong fell again on Monday, with Hong Kong shares snapping a six-day losing streak on fears of looming Trump tariffs. The rising US production and the US-China production gap is also showing up at that level.
In December, China’s exports picked up pace and imports rebounded, ending the year on a positive note, but stocks fell.
But economists suspect the numbers were skewed by pre-loaded exports and were not a reflection of some recovery in demand, leaving aside expected tariff hikes ahead of Trump’s inauguration.
The yuan held the line, but China announced plans to strengthen the unit to stop more dollars in Hong Kong and improve capital flows by allowing companies to borrow more overseas.
Rising US debt yields also continue to weigh on Europe – British gilts are still at the center of the storm there. Britain’s 30-year government bond yield hit a fresh 27-year high on Monday, extending the selloff into a second week, and the pound hit its lowest against the dollar since October 2023.
Britain’s Finance Minister Rachel Reeves, facing criticism at home for traveling to China amid financial market turmoil, said on Saturday she would take action to ensure the government’s budget rules were met.
Back stateside, earnings season is looming — with BlackRock, Citigroup, JPMorgan, Wells Fargo, Goldman Sachs, Bank of New York Mellon all due Wednesday, the same day as the CPI release.
For tech watchers, Taiwan Semiconductor Manufacturing Co. (TSMC) updated Thursday that a major maker of advanced chips used in artificial intelligence applications is expected to report a 58% jump in fourth-quarter profit.
Key developments that should give US markets more direction after Monday:
* US December Federal Budget, December Employment Trends Report, New York Federal Reserve December Consumer Expectations Survey
* The defense ministers of Poland, Germany, Britain, France and Italy met near Warsaw to discuss the Ukraine issue.
* NATO Secretary General Mark Rutte gave a speech in the European Parliament
