Forex
Stocks down, gold up after aborted Russian mutiny ignites safe-haven push
Global shares fell, while gold rose after an aborted uprising by Russian mercenaries raised questions about the authority of President Vladimir Putin, leaving investors little option but to focus on the broader macroeconomic picture.
The MSCI All-World index was last down 0.l%, led by declines in Europe, where defence stocks weighed on the STOXX 600, which fell 0.3%.
Gold, often perceived as a safe-haven in times of geopolitical or market turmoil, rose 0.6% to $1,932 an ounce.
Brent crude futures eased 0.3% to $73.69 a barrel, having earlier fetched as much as $74.80. The rouble (RUBUTSTN=MCX) dropped to a 15-month low early in Moscow.
Russian mercenaries made a short-lived rebellion on Saturday, seizing the southern city of Rostov and advancing on Moscow demanding the removal of Russian military commanders in charge of the war in Ukraine.
The private Wagner army then withdrew after striking a deal guaranteeing their safety and the passage of their leader, Yevgeny Prigozhin, to Belarus.
The consequences for the Ukraine war were not clear, though the challenge to Russian President Vladimir Putin’s authority was the starkest in decades of his leadership.
With little in the way of concrete cues for markets, investors stuck to their recent playbook of favouring fixed income and other safe-havens over equities, particularly in light of Friday’s slew of weak business activity surveys.
“The market is still in this kind of transition phase, but I think the stress that we’ve seen in equity markets started before the news we got on Friday and before the events over the weekend,” Pictet Asset Management economist Frederik Ducrozet said.
“My guess would be that, when in doubt, you just follow the trend over the last few days and you will soon be facing this hawkish vibe from Europe and the central banks,” he said.
Gold, which had hit a three-month low on Friday, rose 0.2% to $1,925 an ounce. U.S. Treasuries were firm with yields, which fall when prices rise, marginally lower.
Two-year yields (US2YT=RR) fell 4 basis points to 4.71%. Ten-year yields fell 5 bps to 3.69%.
“This putsch… has revealed cracks and fragilities that now cannot be unseen,” said Mizuho economist Vishnu Varathan.
“It undeniably amplifies global geopolitical risks.”
JITTERY MARKETS
Defence stocks such as systems. and France’s Dassault Aviation were among the biggest negative weights on the European stock market, while in the U.S. premarket, Lockheed Martin and Northrop Grumman shares were down 0.7-0.9%.
Adding to the sense of unease across markets were the latest travel figures for last week’s holiday in China that were not as strong as expected, once again highlighting how the post-COVID recovery in the world’s second-largest economy is fading.
S&P Global also followed most Wall Street banks and cut its 2023 GDP growth forecast for China on Sunday.
Last week, another round of central banks, including the Bank of England and the central banks of Norway and Switzerland, added to the chorus of voices calling for higher interest rates to wrestle inflation lower.
The S&P 500 staged its biggest one-week drop in three months last week and e-mini futures pointed to another decline at the open later, down 0.2%.
In currencies, the euro was flat against the dollar at $1.0893, but down 0.25% against the pound at 85.49 pence and down 0.5% against the yen after a survey showed another deterioration in business sentiment in Germany this month.
The Ifo institute said its business climate index and Klaus Wohlrabe, the head of Ifo surveys, told Reuters in an interview on Monday the German economy faces the likelihood of a more protracted recession.
European markets showed little reaction to Greece’s conservative New Democracy party storming to victory in a parliamentary election on Sunday. Greek 10-year bond yields (GR10YT=RR) fell 5 bps to 3.55%, while stocks in Athens (.ATG) eased 0.6%.
The yen, which has fallen nearly 9% this year as global interest rate expectations rise and Japan’s central bank stays dovish, bounced as much as 0.5% to below 143 per dollar, partly thanks to speculation around intervention or a policy shift.
Investing.com – The US dollar rose in thin holiday-impacted trade Tuesday, retaining recent strength as traders prepared for fewer Federal Reserve rate cuts in 2025.
At 04:25 ET (09:25 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.1% higher to 107.905, near the recently hit two-year high.
Dollar remains in demand
The dollar has been in demand since the Federal Reserve outlined a hawkish outlook for its interest rates after its last policy meeting of the year last week, projecting just two 25 bp rate cuts in 2025.
In fact, markets are now pricing in just about 35 basis points of easing for 2025, which has in turn sent US Treasury yields surging, boosting the dollar.
The two-year Treasury yield last stood at 4.34%, while the benchmark 10-year yield steadied near a seven-month high at 4.59%.
“We think this hawkish re-tuning of the Fed’s communication will lay the foundation for sustained dollar strengthening into the new year,” said analysts at ING,in a note.
Trading volumes are likely to thin out as the year-end approaches, with this trading week shortened by the festive period.
Euro near to two-year low
In Europe, fell 0.1% to 1.0396, near a two-year low, with the set to cut interest rates more rapidly than its US rival as the eurozone struggles to record any growth.
The ECB lowered its key rate earlier this month for the fourth time this year, and President Christine Lagarde said earlier this week that the eurozone was getting “very close” to reaching the central bank’s medium-term inflation goal.
“If the incoming data continue to confirm our baseline, the direction of travel is clear and we expect to lower interest rates further,” Lagarde said in a speech in Vilnius.
Inflation in the eurozone was 2.3% last month and the ECB expects it to settle at its 2% target next year.
traded largely flat at 1.2531, with sterling showing signs of weakness after data showed that Britain’s economy failed to grow in the third quarter, and with Bank of England policymakers voting 6-3 to keep interest rates on hold last week, a more dovish split than expected.
Bank of Japan stance in focus
In Asia, fell 0.1% to 157.03, after rising as high as 158 yen in recent sessions, after the signaled that it will take its time to consider more interest rate hikes.
edged 0.1% higher to 7.3021, remaining close to a one-year high as the prospect of more fiscal spending and looser monetary conditions in the coming year weighed on the currency.
Beijing signaled that it will ramp up fiscal spending in 2025 to support slowing economic growth.
Investing.com– Most Asian currencies moved in a tight range on Tuesday, while the dollar extended overnight gains as traders positioned for a slower pace of interest rate cuts in the coming year.
Trading volumes were muted before the Christmas break, while most regional currencies were nursing steep losses against the greenback for the year.
Asian currencies weakened sharply last week after the Federal Reserve effectively halved its outlook for rate cuts in 2025, citing concerns over sticky U.S. inflation.
Dollar near 2-year high on hawkish rate outlook
The and both rose about 0.1% in Asian trade, extending overnight gains and coming back in sight of a two-year high hit last week.
While the greenback did see some weakness after data read lower than expected for November, this was largely offset by traders dialing back expectations for interest rate cuts in 2025.
The Fed signaled only two rate cuts in the coming year, less than prior forecasts of four.
Higher U.S. rates diminish the appeal of risk-driven Asian markets, limiting the amount of capital flowing into the region and pressuring regional markets.
Asia FX pressured by sticky US rate outlook
Most Asian currencies weakened in recent sessions on the prospect of slower rate cuts in the U.S., while uncertainty over local monetary policy and slowing economic growth also weighed.
The Japanese yen’s pair fell 0.1% on Tuesday after rising as high as 158 yen in recent sessions, after the Bank of Japan signaled that it will take its time to consider more interest rate hikes.
The Australian dollar’s pair fell 0.2% after the minutes of the Reserve Bank’s December meeting showed policymakers saw an eventual easing in monetary policy, citing some progress in bringing down inflation. But they still flagged potential upside risks for inflation.
The Chinese yuan’s pair rose 0.1% and remained close to a one-year high, as the prospect of more fiscal spending and looser monetary conditions in the coming year weighed on the currency.
Beijing signaled that it will ramp up fiscal spending in 2025 to support slowing economic growth.
The Singapore dollar’s pair rose 0.1%, while the Indian rupee’s pair rose 0.1% after hitting record highs above 85 rupees.
Investing.com — The dollar has surged past its post-2022 range, buoyed by U.S. economic exceptionalism, a widening interest rate gap, and elevated tariffs, setting the stage for further gains next year.
“Our base case is that the dollar will make some further headway next year as the US continues to outperform, the interest rate gap between the US and other G10 economies widens a little further, and the Trump administration brings in higher US tariffs,” Capital Economics said in a recent note.
The bullish outlook on the greenback comes in the wake of the dollar breaking above its post-2022 trading range, reflecting renewed confidence among investors driven by robust U.S. economic data and policy expectations.
A key risk to the upside call on the dollar is a potential economic rebound in the rest of the world, similar to what occurred in 2016, Capital Economics noted.
Following the 2016 U.S. election, economic activity in the rest of the world rebounded, while Trump’s tax cuts didn’t materialize until the end of 2017, and the Fed took a more dovish path than discounted, resulting in a 10% drop in the DXY on the year, which was its “worst calendar year performance in the past two decades,” it added.
While expectations for a recovery in Europe and Asia seem far off, a positive surprise for global growth “should be ruled out”, Capital Economics said.
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