Asian, European markets drop as traders temper rate cut bets

HONG KONG — Stocks fell on Tuesday, extending the sell-off seen on Wall Street, with analysts warning November’s rally fuelled by bets on interest rate cuts may have gone too far, forcing traders to take a step back.

Markets surged last month as data pointing to slowing inflation and softer job markets combined with a dovish turn by Federal Reserve officials to stoke expectations they will next year begin loosening monetary policy.

Those hopes were boosted on Friday when Fed chief Jerome Powell said rates were “well into restrictive territory”.

More than one  percentage point of reductions through to next December have been priced in by futures traders, according to Bloomberg News.

But observers said the euphoria may have caused investors to get ahead of themselves and the next few weeks could be a little bumpy, while they remained broadly upbeat about the new year.

Morgan Stanley strategist Michael Wilson said in a note that this month could see “near-term volatility in both rates and equities” before positive seasonal trends and “January effect” provide a lift in January.

All three main indexes in New York ended in the red, with the S&P 500 coming off a nine percent November rally.

The selling continued on Tuesday. Hong Kong tumbled about 2 per cent while Tokyo and Sydney shed more than 1 per cent apiece.

Shanghai, Seoul, Singapore, Bangkok, Wellington, Taipei, Manila and Jakarta were also well down.

London and Paris dropped in the opening minutes while Frankfurt was flat.

“The biggest near-term risk for the markets could simply be that after a phenomenal one-month rally, a period of consolidation may be a necessary breather,” said UBS Global Wealth Management’s Jason Draho.

“A lot of good news is priced in, and investors seeing little imminent downside risk does make the markets vulnerable to even small disappointments.”

Goldman Sachs strategists said “markets are approaching the limits of what can plausibly be priced without attaching material odds of a recession in the near term”.

Traders are now awaiting the release later in the week of key US jobs data, with a miss to the downside of expectations likely to ramp up optimism for a rate cut in early 2024. However, a forecast-beating reading could jolt markets.

That is followed next week by the Fed’s policy meeting. Most watchers are tipping it to stand pat on rates, though its statement will be parsed for any clues about plans for the next few months.

After markets in Shanghai and Hong Kong closed, Moody’s said it had downgraded its outlook on China’s credit rating citing rising debt in the world’s second-largest economy.

Gold prices dropped after briefly striking a record high Monday on expectations for a rate cut, while bitcoin was also slightly lower, having the day before topped $42,000 for the first time since April last year.

The cryptocurrency has been boosted by hopes that firms including BlackRock will be given US approval to sell the first spot bitcoin exchange-traded funds.