Dollar rebounds as traders rethink Fed rate cut expectations

SINGAPORE, Jan 4 – The dollar edged higher on Thursday as investors reassessed their expectations of the scale of rate cuts by the Federal Reserve this year, with an air of caution hanging over markets after an impressive risk rally last month.

The greenback was on the front foot in early deals in Asia, as trading returned to full swing with Japan back from an extended New Year break.

Against the yen, the dollar stood near a two-week peak and last bought 143.09 yen, having jumped more than 0.9% against the Japanese currency in the previous session, its best day since October.

The Australian dollar, often used as a proxy for risk appetite, languished near Wednesday’s two-week low of USD 0.6703 and last bought USD 0.6734.

The risk-sensitive New Zealand dollar similarly changed hands at USD 0.6249, near its weakest level in two weeks.

Minutes of the Fed’s December policy meeting released on Wednesday showed officials were convinced that inflation was coming under control and were concerned about the risks of the central bank’s “overly restrictive” monetary policy on the economy.

However, there were no clear-cut clues on when the Fed could begin easing rates, with policymakers still seeing a need for rates to stay restrictive for some time.

“The messaging that rates will stay elevated raises a second look at the aggressive cut expectations markets are pricing,” said Christopher Wong, a currency strategist at OCBC.

“Global growth concerns, risk-off sentiment in US equities and markets partially unwinding some of their aggressive bets on Fed cuts are some of (the) factors driving the U.S dollar rebound so far.”

Against a basket of currencies, the greenback rose 0.06% to 102.46, flirting with a three-week peak of 102.73 hit in the previous session.

The euro eased 0.02% to USD 1.0921, while sterling edged 0.05% higher to USD 1.2669 but remained pinned near its recent three-week low.

Separate data out on Wednesday showed US manufacturing contracted further in December, though the pace of decline slowed, while US job openings fell for the third straight month in November, pointing to easing labor market conditions.

Recent data pointing to a cooling US economy have continued to underpin bets of Fed rate cuts this year as inflation comes under control.

However, rising expectations of a soft-landing scenario in the world’s largest economy have left traders divided over the pace and scale of easing from the US central bank.

Market pricing now shows a roughly 72% chance that the Fed could begin cutting rates in March, compared with a 90% chance a week ago, according to the CME FedWatch tool.

The closely-watched US nonfarm payrolls report is due on Friday, which will likely give further clarity on how much room the Fed has to lower rates.

In geopolitics, Hezbollah in Lebanon and the Israeli army made statements suggesting the two avowed enemies wanted to avoid risking the further spread of war beyond the Gaza Strip, after a drone strike killed a Palestinian Hamas deputy leader in Beirut.

(Reporting by Rae Wee; Editing by Shri Navaratnam)

Risk rally hits reality check

The risk rally that has been raging since the Federal Reserve’s dovish tilt in December is pausing for breath as 2024 awakes markets to the prospect the central bank’s interest rate cuts may not be as aggressive as investors expected.

Markets had been pricing in as much as 160 basis points of cuts in 2024, double than what Fed projected, but the New Year has led traders to reassess their outlook, with markets now pricing in less than 150.

That reassessment might end up being temporary and traders may go back to expecting deep rate cuts. However, if risky assets’ early stumbles this year are anything to go by we could be in for some surprises.

The economic calendar is filling up. Minutes from the Fed’s last meeting are due later on Wednesday and will help traders gauge the central bank’s thinking around monetary easing as a slew of labor data this week.

Asian shares extended a global sell-off on Wednesday, with the MSCI’s broadest index of Asia-Pacific shares outside Japan down 1.3% on the day after a near 1% drop on Tuesday, its steepest two-day percentage decline since October.

The dollar, on the other hand, remained buoyant, lifted by rising Treasury yields, keeping pressure on the Japanese yen and the euro. Bitcoin shrugged off the cautious mood and was 0.6% higher at USD 45,255, not far from a 21-month top of USD 45,922 hit on Tuesday.

Futures suggest the dark mood will carry on into Europe with a lower open expected.

In corporate news, the EV battle continues to heat up with China’s BYD claiming the spot as top EV maker, dislodging Tesla TSLA.O even though the US automaker delivered a record number of vehicles in the fourth quarter.

Tesla delivered 494,989 EVs in the October-to-December period, falling short of the 526,409 vehicles that Warren Buffett-backed BYD moved.

(Ankur Banerjee)

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Wall Street notches second lower finish as 2024 starts with profit-taking

Jan 3 – US stock indexes ended the second session of the year down again in extended profit-taking on Wednesday after a strong finish to 2023, with minutes from the Federal Reserve’s December meeting failing to shake off the funk hanging over markets.

It was the first time the benchmark S&P 500 index has started the year with two straight declines since it kicked off 2015 with a three-session skid. It is also its worst two-day result, on a percentage basis, since late-October.

The decline contrasts with the blistering run for all three major Wall Street benchmarks in the final two months of the year. The S&P 500 came within striking distance of its all-time closing high last week as signs of cooling inflation spurred investors to bet on an aggressive rate-cutting schedule.

However, investors have been cautious so far in 2024, wary of the US central bank’s expected pivot to rate cuts this year and how quickly these might be implemented. While the Fed is widely expected to keep rates on hold in January, traders have priced in a 67% chance of a 25 basis point rate cut in March, as per CMEGroup’s FedWatch tool.

The Fed minutes released on Wednesday offered new insight, with policymakers appearing increasingly convinced that inflation was coming under control, with “upside risks” diminished and growing concern about the damage that “overly restrictive” monetary policy might do to the economy.

Little light was shed on when rate cuts might commence though.

“The market wanted to hear when and how much the Fed was going to drop rates, and they didn’t get that – even if it’s not the Fed’s job to do that,” said Jason Betz, private wealth advisor at Ameriprise Financial.

“What we’re seeing play out in today’s selling maybe is a little bit of frustration with the perceived lack of transparency of the Fed.”

Betz noted that profit-taking from 2023’s gains and recalibrations for the new year were likely also factors influencing traders’ thinking.

Shares of rate-sensitive megacap stocks fell, with Nvidia, Apple, and Tesla ending down between 0.7% and 4%.

The S&P 500 lost 38.02 points, or 0.8%, to end at 4,704.81 points, while the Nasdaq Composite lost 173.73 points, or 1.18%, to 14,592.21. The Dow Jones Industrial Average fell 284.85 points, or 0.76%, to 37,430.19.

Airline stocks came under pressure as a jump in oil prices, following disruption at Libya’s top oilfield, raised concerns about fuel costs. The S&P 1500 passenger airlines index tumbled 4%.

Higher crude prices supported the energy index, which advanced 1.5%, the leading gainer among the minority of S&P sectors in positive territory.

Financials was among the sectors that traded lower, off 0.8%, with Charles Schwab and Blackstone among those pulling down the index. They dropped 3% and 4.6%, respectively, after Goldman Sachs downgraded the stocks to “neutral” from “buy.”

However, Citigroup gained for a second straight day, rising 1.1% to its highest finish since mid-August 2022, as the bank continued to benefit from a price target upgrade and an upbeat analyst report from Wells Fargo released the previous day.

The volume on US exchanges was 11.84 billion shares, compared with the 12.35 billion average over the last 20 trading days.

(Reporting by Sruthi Shankar and Shristi Achar A in Bengaluru and David French in New York; Editing by Shinjini Ganguli and Richard Chang)

US chip stocks tumble after strongest year since 2009

Jan 3 – US chip stocks added to a string of losses on Wednesday, with Wall Street’s main semiconductor benchmark tumbling from record highs following its strongest year since 2009, when the sector bounced back after the financial crisis.

Drops of over 2% in Advanced Micro Devices, Qualcomm, and Broadcom weighed most on the PHLX semiconductor index, which was down 2.1%.

The chip index has now declined almost 7% since reaching a record high close on Dec. 27.

This week’s drop in semiconductor stocks has tracked a broad Wall Street decline as investors await the Federal Reserve’s December meeting minutes due later on Wednesday for clues on its interest rate path.

Fueled by optimism about artificial intelligence and more recently by expectations the Fed will cut interest rates this year, the PHLX surged 65% in 2023, its strongest performance since 2009. That compares to annual gains of 43% and 24%, respectively, for the Nasdaq and S&P 500.

Chip stocks have also benefited from bets that a downturn in global demand last year that saw memory chip makers cut production has largely bottomed out.

Nvidia, viewed as the top provider of AI-related chips, saw its stock market value more than triple in 2023 to USD 1.2 trillion, making it Wall Street’s fifth most valuable company. It dipped almost 1% on Wednesday.

In a client note, BofA Global Research analyst Vivek Arya recommended exposure to cloud computing and cars through stocks including Nvidia, Marvell Technology, NXP Semiconductors, and ON Semiconductor. Arya also recommended stocks including KLA Corp. and Arm Holdings, for exposure to the increasing complexity of chip designs.

In another note, Wells Fargo analyst Joe Quatrochi said he expects a muted recovery for chip equipment sellers in 2024, and pointed to KLA and Applied Materials as top picks in that industry.

(Reporting by Noel Randewich; Editing by David Gregorio)

Bond ETFs draw in record USD 300 billion in 2023 – BlackRock

LONDON, Jan 3 – Bond exchange-traded funds (ETFs) gathered an annual record of USD 300 billion of assets under management in 2023, BlackRock said on Wednesday, as investors were lured in by the highest yields in decades.

BlackRock, the world’s biggest asset manager, said it expects bond ETFs to grow to USD 6 trillion under management by 2030, from just over USD 2 trillion currently.

It took 17 years from BlackRock’s launch of the first bond ETF in 2002 for the market to raise USD 1 trillion, but just three more years to double that amount to USD 2 trillion by July of last year.

Bond yields surged last year as central banks raised interest rates to tame inflation, making fixed-income funds look more attractive than they had in years.

Strategists and investors have said ETFs offer benefits over more traditional mutual funds, including that they trade throughout the day and typically have lower fees.

Data shows that mutual funds have been losing ground to ETFs in the bond market. US fixed-income mutual fund assets peaked in November 2021 at USD 5.6 trillion, according to ICI data, but had fallen to around USD 4.6 trillion by the summer of 2023.

(Reporting by Harry Robertson; editing by Dhara Ranasinghe)

Dollar holds steady as risk rally stalls

SINGAPORE, Jan 3 – The dollar eased slightly on Wednesday though it stayed near a two-week high, underpinned by a confluence of factors including elevated US Treasury yields and a cautious turn in risk sentiment that weighed on Wall Street.

Trading was thinned in Asia with Japan out on a holiday, with the greenback paring some of the morning gains over the course of the trading day in the region.

The New Zealand dollar, often used as a proxy for risk appetite, was last 0.29% higher at USD 0.62695, having slid to a two-week low of USD 0.62485 earlier on Wednesday.

The Australian dollar likewise bounced 0.09% to USD 0.6767, after also hitting a two-week trough of USD 0.6756 during the session.

Still, against a basket of currencies, the greenback stood not too far from a two-week top of 102.25 hit on Tuesday, and was last at 102.13.

The dollar index had jumped 0.86% on Tuesday, which marked its best daily performance since March 2023.

A surge in risk appetite at the end of last year – sparked by a dovish tilt in the Federal Reserve’s December policy meeting which further fueled bets for US rate cuts in 2024, had toppled the greenback and sparked a rally in Treasuries and stocks.

That, however, failed to carry on into the New Year, with a bout of risk aversion causing the S&P 500 and Nasdaq Composite to close their first trading session of 2024 lower, dragged down by big tech names. .N

“We’ve just seen quite a significant reversal in risk sentiment,” said Ray Attrill, head of FX strategy at National Australia Bank (NAB). “Higher US yields, weaker U.S. stocks equals stronger dollar. I think that’s the simple story.”

“The kiwi dollar, which has been one of the more risk-sensitive currencies, has sort of underperformed versus most other currencies as well,” said Attrill.

The euro and sterling were meanwhile nursing deep losses, after the currencies had on Tuesday clocked their worst daily performance in months.

The euro rose 0.14% to USD 1.0955 after having lost 0.95% on Tuesday, its largest daily decline since July last year.

Sterling gained 0.11% to USD 1.2633, having slid 0.87% in the previous session, its sharpest daily fall in nearly three months.

The greenback was underpinned by a rebound in US Treasury yields, which saw the benchmark 10-year yield hitting an over two-week high in the previous session.

Cash trading of Treasuries in Asia was closed on Wednesday given the holiday in Japan.

Elsewhere, the yen remained under pressure and slid roughly 0.1% to 142.05 per dollar, after falling nearly 0.8% in the previous session.

Analysts said the risk-off mood was also in part driven by concerns over escalating geopolitical tensions, after Israel killed Hamas deputy leader Saleh al-Arouri in a drone strike in Lebanon’s capital Beirut on Tuesday.

“I suspect that markets (are) starting the year with finding it hard to completely ignore geopolitics,” said NAB’s Attrill.

(Reporting by Rae Wee; Editing by Shri Navaratnam)

Yields jump in new year sell-off as rate cut hopes moderate

NEW YORK, Jan 2 – US Treasury yields popped to two-week highs Tuesday on the first trading day of the new year as traders lowered expectations for rate cuts in 2024.

Markets are pricing in that the Federal Reserve will cut benchmark rates beginning in March by a total of 150 basis points this year, down from expectations of more than 160 basis points in cuts seen last week.

The jump in yields, which move in the opposite direction to prices, was expected given the outsized rally in Treasuries over November and December in response to signs that inflation was cooling more than expected and the Federal Reserve was closer to cutting rates, said David Albrycht, chief investment officer at Newfleet Asset Management.

“Things may have gotten a little ahead of themselves, whether it’s equity valuations or expectations of Treasury rate cuts,” he said. “People have become really complacent that the Fed is going to execute a soft landing but it’s still not clear.”

The yield on 10-year Treasury notes was up 8.3 basis points at 3.943%, roughly 15 basis points above its six-month low hit in December. The yield on the 30-year Treasury bond was up 6.5 basis points at 4.083%.

The two-year US Treasury yield, which typically moves in step with interest rate expectations, was up 8.5 basis points at 4.335%.

Investors will monitor economic figures this week, including jobs data on Friday that may influence whether the Fed begins to cut rates in March as markets expect. The minutes from the central bank’s December policy meeting will be released Wednesday.

The New York Fed said on Tuesday that it had accepted USD 704.9 billion submitted to its overnight reverse repo facility on Jan. 2, well below the USD 1.018 trillion it accepted on the final trading day of 2023. The Fed’s reverse repo facility exists to put a floor underneath short-term interest rates and has been shrinking as the Fed continues to draw down liquidity.

Futures markets see a nearly 70% chance of a 25 basis point rate cut at the March 20 meeting, up from a 55% chance seen a month ago, according to CME’s FedWatch Tool.

Markets will likely focus on the upcoming labor market data to gauge the next move in Treasuries, said Ian Lyngen, head of US rates strategy at BMO Capital Markets.

“We’re skeptical that anything on the near-term macro horizon will materially alter the underlying tone favoring higher yields,” he said.

January 2 Tuesday 3:31 PM New York / 2031 GMT

	Price	Current Yield %	Net Change (bps)
Three-month bills	5.2275	5.381	0.030
Six-month bills	5.045	5.2588	-0.003
Two-year note	99-215/256	4.3346	0.085
Three-year note	100-192/256	4.1016	0.099
Five-year note	99-52/256	3.9273	0.097
Seven-year note	98-202/256	3.9498	0.088
10-year note	104-132/256	3.9425	0.083
20-year bond	106-184/256	4.2456	0.065
30-year bond	111-116/256	4.0826	0.065

(Reporting by David Randall; Editing by Tomasz Janowski and Lisa Shumaker)

Dollar set for biggest daily jump since October as US yields rebound

NEW YORK, Jan 2 – The dollar rose on the first trading day of the year, supported by higher US yields while investors waited for US jobs data and European inflation numbers for clues on central banks’ policies.

The dollar index, which measures the US currency against six counterparts, rose 0.799%, on track for its biggest daily percentage gain since October.

It fell 2% in 2023, snapping two years of gains due to investor expectations that the US Federal Reserve will cut rates significantly this year while the economy remains resilient.

In US Treasuries, benchmark 10-year notes were up 7.7 basis points at 3.937%, eying their biggest daily increase in more than three weeks.

While the dollar came under pressure last month after the Federal Reserve indicated that it would cut rates in 2024, Brown Brothers Harriman & Co global head of currency strategy Win Thin said “markets are coming to realize that the US economy remains robust” and is likely to stay robust this year.

But while Thin argues that “a soft landing would likely lead to 2-3 insurance cuts in 2024,” the market is pricing in six rate cuts this year.

So until these expectations shift, the dollar could stay “under pressure and vulnerable,” he said.

On the other side of the dollar’s ascent was the euro, which was down 0.91% to USD 1.0944 as traders digested data showing euro zone factory activity contracted in December for an 18th straight month, and sterling was last trading at USD 1.2619, down 0.82% on the day.

The Japanese yen weakened 0.75% versus the greenback at 141.94 per dollar.

Investors have a fairly busy week ahead with a slew of economic data including European inflation data and US data on job openings and non-farm payrolls, which will help shape market expectations regarding monetary policy moves from the Fed and European Central Bank.

Minutes from the most recent meeting of the Fed’s rate-setting Federal Open Market Committee in December are scheduled for release on Wednesday and will provide further insight into the central bankers’ thinking on the potential for a move to interest rate cuts.

Markets are now pricing in a roughly 79% chance of interest rate cuts from the Fed starting from March, according to CME FedWatch tool.

Traders were also processing volatile oil prices with an earlier rally disappearing with interest rate jitters in focus as concerns eased that tensions in the Red Sea could disrupt supplies.

That, however, did not help currencies of oil-exporting countries hold off the stronger greenback.

The dollar climbed 1.7% on the Norwegian crown and rose 0.6% against the Canadian dollar while the Australian dollar dipped 0.8% against the greenback.

The crypto world started the year with a bang, with bitcoin up 3.3% after earlier touching USD 45,912.48, its highest level since April 2022, on rising expectations that the US Securities and Exchange Commission will soon approve exchange-traded spot bitcoin funds.

(Additional reporting by Alun John in London, Ankur Banerjee in Singapore; editing by Chizu Nomiyama, Bernadette Baum, and Nick Zieminski)

Gold begins new year restrained by stronger dollar

Jan 2 – Gold entered 2024 under pressure from a jump in the US dollar, but held its ground on expectations the Federal Reserve will cut interest rates this year and rising concerns over attacks on shipping in the Red Sea.

Spot gold steadied at USD 2,061.59 per ounce on Tuesday by 2:30 p.m. ET (1930 GMT) after rising as much as 0.8% earlier in the session. US gold futures slipped 0.1% to USD 2,070.30.

The dollar index rose 0.8% on track for its biggest daily gain since July, supported by higher US yields, making dollar-priced bullion more expensive for overseas buyers.

But the possibility of escalation in the Red Sea kept gold prices supported, said Daniel Pavilonis, senior market strategist at RJO Futures.

Gold prices surged 13% in 2023 in their first annual rise since 2020 and are forecast to reach record highs in 2024, as lower interest rates reduce the opportunity cost of holding non-yielding bullion.

“As we saw how much of a lift the price of gold obtained from expectations of rate cuts in 2023, we could well see significant gains in 2024 when central banks actually start loosening their policies,” said Fawad Razaqzada, market analyst at City Index, adding that the actual timing and extent of the rate cuts will depend on incoming data.

This week, market attention is on the minutes, scheduled for Thursday, of the last Fed meeting. Data on US job openings and December non-farm payrolls, both due on Friday, will also be closely followed.

Silver fell 0.5% to USD 23.64 per ounce while platinum was down 0.5% to USD 982.18.

Palladium slipped 2.2% to USD 1,074.62, its lowest since Dec. 14.

“The outlook for palladium demand partly hinges on the pace of the energy transition, particularly growth in EV demand, as higher battery electric vehicle growth is negative for palladium demand,” HSBC said in a note.

(Reporting by Sherin Elizabeth Varghese in Bengaluru; additional reporting by Deep Vakil; Editing by Alexander Smith, Emelia Sithole-Matarise, and Sriraj Kalluvila)

For investors, 2024 is year of transition to a new economic order

Jan 2 – Investors appear convinced that major Western central banks are close to a much-awaited pivot, from raising interest rates to cutting them. Markets rallied as a result, but 2024 could hold surprises as the world adjusts to an economic order where money is not cheap.

Global stocks rallied and top government bond yields fell in recent weeks, despite central bankers cautioning against pivot bets. In the United States, for example, investors are now effectively positioned for the Federal Reserve guiding the economy to a perfect landing, bringing down inflation without triggering a recession.

The market’s conviction comes after the US economy surprised people with its resilience. That was cushioned in part by consumers’ pandemic savings and America’s attractiveness as a safe port for investments in an increasingly chaotic world. They could be right — a well-known economist and former Fed official earlier this year argued the Fed has managed soft landings more often than is generally believed.

But many investors and executives think the probability is low. The pandemic-era savings are getting depleted and storm clouds are gathering, especially with what’s shaping to be contentious US elections.

Investors are betting that the Fed could cut rates by as much as 1.5% by the end of 2024, but that would still leave policy rates at close to 4%, higher than where it has been for most of the past two decades. At that level, monetary policy will still be a drag on growth, as it would be above the so-called neutral rate at which the economy neither expands nor contracts.

Add to that a host of other risks to the outlook in 2024 — two major wars, heightened geopolitical tensions that have put globalization firmly in reverse, and elections in several countries that could radically change the world order in unexpected ways.

WHY IT MATTERS

Interest rates underpin everything, from economic growth to the price of financial assets and how much it costs to borrow to buy a car or a house.

Higher rates make riskier assets, such as technology stocks and cryptocurrencies less attractive, as investors can earn a decent return without having to take on much risk.

With money harder to come by, riskier bets can fail and bubbles burst, leading to events such as the US regional banking crisis last March. As businesses struggle, they retrench. People lose jobs and new ones get scarce.

WHAT IT MEANS FOR 2O24

While the Fed and other banks have been raising rates for well over a year, the world is yet to complete the transition from the time when money was free to a period when it no longer is. 2024 is likely to be the year when the effects of that transition manifest more clearly.

That means companies – and in some cases, entire countries — will have to restructure their debt liabilities, as they can no longer afford to pay interest. Some of that is already visible in emerging market debt negotiations and rising bankruptcies of companies. US corporate bankruptcy filings hit the highest since 2020. More are likely on the horizon.

In the economy, sectors such as commercial real estate, where some office markets have been hit hard by new ways of working post-pandemic, will see more pain. More landlords will likely have to revalue their portfolios and give up the keys to buildings, with losses flowing through to banks and investors as is happening now with insolvent European property company Signa.

For consumers, while savings would yield more, higher borrowing costs will require an adjustment. Many US adults have only known low interest rates for their 30-year mortgages, for example. They’d need to come to terms with rates that are more than twice as high and make the math work for their budgets.

Bottomline: investors’ convictions will likely get tested, as everyone will have to figure out how to live with higher interest rates.

(Reporting by Paritosh Bansal; Editing by Anna Driver)

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