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Stock and bond markets sell off as rate cut hopes dim

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Stocks and bonds fell on Friday, deepening one of the worst starts to the year in the past decade for global markets as recent hopes that interest rates will soon be cut have dimmed in the face of stronger economic data and warnings by policymakers.

The rates rethink has left global bond markets down 1.36 per cent this week, their worst start to a year in 14 years and on track for the steepest weekly fall since May, as measured by the Bloomberg Global Aggregate index. Bond prices fall as yields rise.

In New York, both the S&P 500 and the Nasdaq Composite indices are suffering their third weakest starts in the past decade. The region-wide Stoxx Europe 600 was down early on Friday along with US futures, even as eurozone inflation came in slightly below expectations and ahead of the release of December’s closely watched US non-farm payrolls data — the main event in a busy week of economic data.

The shift in sentiment has been abrupt after a rally into year-end on rising expectations that where the Federal Reserve would lead with interest rate cuts in 2024, Europe’s generally weaker economies would force its central banks to follow. 

But the minutes of the Fed’s last meeting, published on Wednesday, painted a more hawkish picture than many had hoped, leading investors to lower expectations for any imminent easing.

Last quarter’s “everything rally” has hit a wall as a result. “Experience suggests that after a party, there is normally a bit of a hangover to follow,” said Mark Dowding, chief investment officer at RBC BlueBay.

He added that hopes of a so-called soft landing for the US economy, in which inflation falls back to around the Fed’s 2 per cent target without triggering a recession, risked being “disappointed if data do not conform conveniently to this narrative”.

Fed funds futures contracts have retreated from pricing in a 90 per cent chance of the first rate cut coming in March to roughly a two-thirds bet currently. While the Fed’s rate-setters have forecast three quarter-point rate cuts over the next 12 months, markets have priced in at least five. 

Tech stocks have led the way during the current sell-off with Apple tumbling more than 5 per cent — wiping out $165bn in market value — after receiving two analysts downgrades, including a rare sell rating. 

However, some analysts flagged that the stock market’s poor start to the year was to be expected given the scale of the rally at the end of 2023, and that optimism could yet be revived if December’s non-farm payrolls report were to show evidence of cooling across the labour market.

“Bulls need a bullseye or something reasonably in the neighbourhood. Bears are looking for a miss,” said Mike Zigmont, head of trading at Harvest Volatility Management. “Surprises are unwelcome.”

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