June 13 2024: Global stocks pulled back from record highs on Thursday as optimism from slowing U.S. inflation and reassuring Fed signals gave way to renewed weakness in Europe due to political and tariff concerns.
Bond market borrowing costs and the dollar rose after the Fed tempered rate cut expectations. However, these moves only partially reversed the significant declines from the previous day, with markets largely focusing on dramatic developments elsewhere.
In Europe, the continent-wide STOXX 600 fell 1%, driven down by a 2.2% slump in car manufacturers. This came after China indicated it would respond to the EU’s decision to impose tariffs of up to 38.1% on China-made electric vehicles starting next month.
Bank stocks also dropped, reflecting both the market’s altered outlook on interest rates and the uncertainty caused by this week’s sharp rightward shift in EU elections and France’s decision to call a snap parliamentary election.
The spread between French and German bonds remained steady at 61 basis points, having reached its widest since March 2023 earlier in the week. Yields on most sovereign bonds were 1-3 basis points higher following Wednesday’s softer-than-expected U.S. CPI data, which had prompted their largest falls since mid-May.
AXA’s Chief Economist Gilles Moec commented, “The Fed shift could have been significant, but it was overshadowed by the U.S. inflation data we received.” Regarding the EU’s EV tariffs, he noted that the EU is taking a more targeted approach compared to the blanket measures often seen from the United States. “Protectionism gained considerable traction during the EU election campaigns,” he added.
Japanese shares and the yen underperformed overnight as the Bank of Japan began a two-day policy meeting expected to lean towards modest policy tightening.
MSCI’s index of Asia-Pacific shares outside Japan climbed 0.6%, with Taiwan’s tech-heavy stock market surging 1.8% to a new high, buoyed by the U.S. S&P 500 and Nasdaq reaching all-time peaks on Wednesday.
Close Call
Chinese stocks were also impacted by the European EV tariffs, which follow the U.S.’s recent announcement to quadruple duties on Chinese EVs to 100%. Brussels stated that the tariffs would range from 17.4% for BYD to 38.1% for SAIC, on top of the standard 10% car duty, bringing the highest overall rate to nearly 50%.
Additional geopolitical moves included the U.S. imposing a new ban on Russian stock trading and the G7 leaders supporting a $50 billion transfer of frozen Russian central bank reserves to Ukraine.
Despite this, Wall Street futures pointed to further gains, with the S&P expected to open 0.2% higher and the Nasdaq 0.6% higher, as markets awaited the May producer price index reading and weekly jobless claims data.
“Ultimately, markets prefer strong economic growth with no rate cuts over faltering growth with multiple rate cuts,” said David Chao, global markets strategist at Invesco Asia Pacific. “We are in an environment where the timing of the first Fed rate cut is less critical for market performance.”
In his post-meeting press conference, Fed Chair Jerome Powell indicated that the decision on the rate path was a “close call” for many policymakers, with the expectation of additional cuts in 2025 compensating for a delayed start this year.
The closely watched CPI report earlier showed core U.S. prices growing at their slowest annual pace in over three years last month. Analysts believe these figures were not available in time to influence the Fed’s forecasts.
“The Fed has frequently revised its expected policy path, so we don’t place much weight on its new projections,” said Jean Boivin, head of the BlackRock Investment Institute.
The U.S. 10-year Treasury yield, a key driver of global borrowing costs, stood at 4.31% in Europe, in the middle of its trading range from the previous day. Japan’s 10-year yields fell by up to 3 basis points to 0.955%, marking their lowest level since mid-May.
The Nikkei newspaper reported that the BOJ might discuss reducing monthly bond purchases at its policy meeting ending on Friday, echoing earlier reports from Reuters and other outlets.
The yen underperformed against the dollar overnight, losing 0.3% to 157.17 per dollar, erasing Wednesday’s 0.3% gain. The euro remained steady at $1.08 after having its best day of the year, despite three days of politically driven losses.
In other markets, gold fell 0.5% to $2,310.30 per ounce, and oil dipped to $82 a barrel following a larger-than-expected rise in U.S. stockpiles. However, Brent crude is on track for its best week since early April.
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