European bonds and stocks profit from rate cut bets: Markets wrap

(Bloomberg) — European stocks gained and bond yields across the euro region edged lower on Wednesday as worsening economic data, slowing inflation and underlining expectations for an interest-rate cut next year.

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Germany’s 10-year yield fell below 2% for the first time in nine months, the report showed, as producer prices fell more than expected in November. The Stoxx Europe 600 index was 0.4% higher, led by interest rate-sensitive real estate and retail stocks.

Britain’s FTSE 100 benchmark fared better, rising to 1.3%, as data showed inflation fell below analysts’ estimates in November, with the Bank of England leading the way for rate cuts next year. The pound fell to a three-week low and the yield on 10-year gilts retreated 11 basis points.

Traders are betting that falling inflation and softening economic growth will prompt the European Central Bank to ease rates next year. Money markets are approaching a 50% chance of an ECB rate cut by March next year.

A gauge of German business expectations released earlier this week showed a surprising deterioration in December. Analysts polled by Bloomberg predicted the region would enter its first recession since the pandemic. At the same time, euro-area inflation has continued to ease, reaching 2.4% in November from a peak of over 10% last year.

US stock futures were flat after the Nassaq 100 hit another record high. The 10-year Treasury yield fell two basis points to 3.91%.

Speculation about Fed easing is making investors more optimistic than early 2022, Bank of America Corp. said in a survey on Tuesday. Traders are offloading bets on higher short-term U.S. yields as investors pull back from the urge to fight the bleak core.

Richmond Federal Reserve President Thomas Parkin reinforced the more dovish tone by suggesting that the US central bank will cut interest rates if the recent uptick in inflation continues. However, other policymakers have pushed back more aggressively against rate cut challenges. Chicago Fed President Austin Goolsbee and Cleveland Fed’s Loretta Mester suggested on Monday that expectations were premature.

Investors await data readings from the U.S. on Wednesday’s ongoing home sales, Thursday’s print of third-quarter gross domestic product and Friday’s durable goods orders and personal consumption expenditures — the central bank’s favorite measure of inflation — to confirm their rate bets.

Meanwhile, Japan’s benchmark government bond yields fell to their lowest level since the Bank of Japan reversed yield curve controls in late July. Meanwhile, the Nikkei 225 stock index rose to a more than five-month high as the central bank kept investors in the dark about when it might adjust policy. The yen gained for the first time in four days.

“A soft US dollar, soft European yields and a pleasant overnight rally on Wall Street set the stage for a pleasant start,” said Vishnu Varadhan, Asia head of economics and strategy at Mizuho Bank Ltd in Singapore. “Shooting a soft JPY Nikkei on the back of BOJ pushback was also sweet for equity bulls in Asia to signal rallies in the US.”

In the corporate world, Alibaba Group Holding Ltd. CEO Eddie Wu will take over the company’s core e-commerce business, replacing one of its most experienced executives at the helm of China’s largest online marketplace.

Oil was little changed after two days of gains as traders and shippers took advantage of the possibility of more disruption in the Red Sea. Gold was also flat.

Highlights of this week:

  • American Conference Board Consumer Confidence, Existing Home Sales, Wednesday

  • Bank Indonesia interest rate decision, Thursday

  • US GDP, Initial Unemployment Claims, Conf. Board leading index, Thursday

  • Nike earnings, Thursday

  • Japan Inflation, Friday

  • UK GDP, Friday

  • US personal income and spending, new home sales, durable goods, University of Michigan consumer sentiment index, Friday

Some key movements in the markets:

Shares

  • The Stoxx Europe 600 was up 0.4% as of 8:18 a.m. London time.

  • S&P 500 futures were little changed

  • Nasdaq 100 futures were little changed

  • The future of the Dow Jones Industrial Average was little changed

  • The MSCI Asia Pacific index rose 0.6%

  • The MSCI emerging market index rose 0.3%

Coins

  • The Bloomberg Dollar Spot Index was little changed

  • The euro fell 0.1% to $1.0968

  • The Japanese yen rose 0.2% to 143.54 per dollar

  • The offshore yuan fell 0.2% to 7.1355 per dollar

  • The British pound fell 0.6% to $1.2659

Cryptocurrencies

  • Bitcoin rose 0.9% to $42,869.03

  • Ether rose 1.2% to $2,211.99

Bonds

  • The yield on 10-year Treasuries fell two basis points to 3.91%.

  • Germany’s 10-year yield fell two basis points to 2.00%.

  • Britain’s 10-year yield fell 11 basis points to 3.54%

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This story was produced with the help of Bloomberg Automation.

–With assistance from Tasia Sibahuder and Yumi Teso.

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