US index futures posted modest gains and the dollar reversed gains at the start of a crucial week for policy decisions by the Federal Reserve, the European Central Bank and a host of their peers.
Contracts on the S&P 500 and Nasdaq 100 indices were about 0.1 percent higher after weekly losses for the underlying indices. Treasury bonds advanced with the 10-year yield losing 3 basis points. Oil fell as traders weighed the demand outlook amid growing economic concerns. The Stoxx Europe 600 Index slipped for the sixth time in seven days.
Investors are looking for clearer clues as to how far and how quickly central banks will tighten monetary policy from now on as recession fears resurface. The Fed is forecast to slow its rally to 50 basis points on Wednesday, although officials said borrowing costs will need to remain tight for some time. Tuesday’s US inflation numbers will shed more light on whether that’s the case or whether markets have reason to expect rate cuts in late 2023.
“Throughout the year we have seen the Fed take serious aggressive monetary policy action to control inflation,” wrote Naeem Aslam, chief market analyst at Ava Trade Ltd., in a note. “However, the last reading led the Fed to believe that inflation has started to move in the right direction. That means they have less to do as there is a lot more tailwind behind it that will continue to push inflation lower.”
Still, a resilient labor market and lingering inflation concerns are preventing traders from getting optimistic. Divergent economic prospects across regions of the world, from Covid resurgence in China to energy volatility in Europe, are keeping risk sentiment in check. The dollar was little changed after previously posting a small gain.
After the Fed, the ECB will announce its interest rate decision on Thursday and may opt for a 50 basis point hike. Markets also have to contend with decisions by the Bank of England and monetary authorities in Mexico, Norway, the Philippines, Switzerland and Taiwan.
While this year’s turmoil is an indicator that global stocks are heading for their biggest annual loss since 2008, the world’s biggest investors are forecasting stocks to post low double-digit gains in 2023. As many as 71 percent of respondents in a Bloomberg News poll expect stock prices to rise, while 19 percent expect them to fall. For those who saw gains, the average response was a 10 percent return.
Europe’s equity benchmark fell. All sub-groups of the industry posted losses, with resource companies being the biggest detractors. An index of Asian stocks fell, ending a two-day winning streak. The rapid spread of Covid cases in China added to concerns, with Hong Kong’s Hang Seng index falling about 2 percent.
Government bonds rose across the curve, with longer-dated securities seeing more yield declines than shorter-dated ones.
West Texas Intermediate Oil traded 0.9 percent lower. Crude oil remains on track for its first straight quarterly decline since mid-2019 as demand prospects deteriorate and low liquidity exacerbates price volatility into year-end. Bloomberg News