Stocks Wobbly, gold steadies as markets decide on rate cut bets

Stocks Mixed 

Stocks this morning are a little wobbly with the FTSE 100 down 0.4%, the CAC +0.2% and the DAX pretty flat, after Asian shares fell despite a pick-up in China’s services activity. The moves come off a minor pullback on Monday that followed last week’s sharp rise as bond yields retreated on markets bringing forward their rate cut expectations. US stocks were weaker yesterday, with the S&P 500 down half a percent and Nasdaq down more as bulls booked profits after a rampant rally since the tail end of Oct. US stock futures look lower today. 

Energy and USD 

Energy shares and miners fell as oil and iron ore prices declined amid demand worries – oil is trying to firm up today after hitting its lowest in three weeks yesterday. But despite Treasury yields remaining under pressure some of that move reversed yesterday as the dollar made gains, gold snapped back lower after hitting a fresh all-time high and stocks eased back. Treasury yields move around a lot, up 10bps as it swung from 4.20% to 4.30% on the day, though was last trading down around 4.24%. 

At This Rate... 

ECB’s Isabel Schnabel, a hawk, said “the most recent inflation number has made a further rate increase rather unlikely”. We know the bar for hiking is super high now, the question is when to cut, if at all. Traders have priced in a rate cut by the ECB by March, and a better-than-evens chance the Fed pulls the trigger in the spring. UK interest rate swaps bring forward expectations for first rate cut – almost priced in fully for June 2024. As we approach key central bank meetings in December and some important data releases this week on the jobs front we should get further narrative projections on rate cuts in 2024 – as long as the story holds for now we can get a Dec pump – look for a change to forward guidance signalling a possible pivot next week. On the other hand we could see some disappointment if the CBs stick to the H4L line.  

Gold Finds Footing After Stumble 

Elsewhere, gold was steadier around $2,035 having breached $2,140 on Monday to take out the all-time high. Gold ‘s advance to record highs is part of a wider rally in risk assets that began in November as yields began to tumble on investors becoming more certain the Fed and other central banks would start cutting rates soon.  After scaling 16-year highs in October the benchmark 10yr Treasury yield has declined from above 5% to 4.25% to hit a two-month low, whilst the US dollar has plumbed its lowest level in three months. Strong central bank purchasing, seasonal flows and geopolitical tensions have added to gold’s appeal lately. My hunch is this is flows catching the tailwinds of markets betting big on rate cuts at the same time as thinking inflation is going to remain higher. Not sure this is too soon for gold – the reaction to the aggressive buying yesterday suggests most agree but prices should remain supported unless we see yields really flip higher again. Focus for today now shifts to the ISM services PMI, expected at 52.2, and the US Jolts job openings seen at 9.31m.  

RBA Unch  

The Reserve Bank of Australia left its cash rate at 4.35% in a move expected by markets after October’s inflation print fell to 4.9%. The following passage from the November meeting, when the RBA raised the cash rate 25bps, was maintained this time: 

"Whether further tightening of monetary policy is required to ensure that inflation returns to target in a reasonable timeframe will depend upon the data and the evolving assessment of risks."   

The decision has left the Aussie weaker with AUDUSD testing the key 200-day SMA 0.6579 - this is the key area to watch now and check the MACD crossover imminent could see retest of 0.650.