Nervy stocks slip on upcoming data and Red Sea tensions

  • Dollar rises 0.2%, S&P 500 futures -0.3%
  • Bonds run into profit-taking, gold falls after topping $2,100
  • Wagers on U.S. rate cuts to be tested by payrolls
  • Shipping attacked in Red Sea, oil still struggling

LONDON, Dec 4 (Reuters) – Wall Street stock futures slipped on Monday, as investors turned wary ahead of a slew of economic data this week that will test market wagers on rate cuts from major central banks and the state of the world economy next year.

At 0722 ET, Dow e-minis 1YMcv1 were down 0.3%, S&P 500 e-minis EScv1 were down 0.4% and Nasdaq 100 e-minis NQcv1 were down 0.5%.

Attacks on commercial vessels in the Red Sea on Sunday risked reigniting investor worries about a widening of the war between Israel and Hamas, potentially complicating the outlook for a rally that saw U.S. stocks crest a fresh closing high for the year last week.

“So far, that situation seems to be quite contained. But the spillovers, the risks around this, can’t be underestimated — the risks to oil if Iran became involved, and obviously that could have a big spillover effects on supply chains, inflation and financial markets broadly,” said Paul Watters, head of European credit research at S&P Global Ratings.

Also front of mind for analysts and traders was the U.S. November payrolls report due on Friday, which needs to be solid enough to support the economic soft-landing scenario, but not so strong as to threaten the chance of easing. Median forecasts see payrolls to rise 180,000, keeping unemployment steady at 3.9%.

Wage growth still sits above the Fed’s target, said Bruno Schneller, managing director at INVICO Asset Management. If upcoming data aligns with expectations, it could mean the end of rate hiking this year and a shift to cuts in 2024.

“Considering the upcoming 2024 U.S. presidential election, the Fed will likely avoid actions that could be perceived as favouring any candidate, leading us to expect no major surprises and a continued data-dependent approach from the Fed,” said Schneller.

Futures now imply a 60% chance the Fed will ease as soon as March, up from 21% a week ago, and are pricing in around 135 basis points (bps) of cuts for all of 2024.

The turnaround in Treasuries has been nothing short of astonishing as two-year yields fell 41 bps in just a week, the best performance since the mini-crisis in the U.S. bank sector in March.

So it was no surprise that some profit-taking emerged on Monday and nudged yields on 10-year notes to 4.25%, but still well short of the October top of 5.02%.

BULLISH FOR EM

The tumble in Treasury yields in turn pulled the rug out from under the dollar, particularly against the yen, where it slid 1.8% last week and was last down at 146.62 .

Speculation about an eventual unwinding of the Bank of Japan’s super-loose policies has added to the pressure on yen carry trades and could carry the Japanese currency back to its July highs around 138.00. The dollar rose 0.2% against a basket of currencies =USD.

The euro ticked down 0.1% to $1.0868. It has also been climbing recently, but suffered a reversal last week when surprisingly soft inflation data led markets to price in a March rate cut from the European Central Bank.

The ever-hawkish Bundesbank President Joachim Nagel pushed back against the doves in an interview over the weekend. But with inflation subsiding so fast markets figure the ECB will have to ease just to stop real rates from rising.

ECB President Christine Lagarde will have her own chance to comment in a speech and Q&A later on Monday.

The dive in yields has been a boon for non-yielding gold, which hit a record of $2,111.39 an ounce before sliding back to $2,066.73.50 an ounce by 1232 GMT.

Oil prices dropped on doubts that OPEC+ will be able to maintain planned output cuts. Underlining this, U.S. oil production is at record levels above 13 million barrels a day and rig counts are still rising.

The attacks on shipping in the Red Sea offered only fleeting support and Brent eased 43 cents to $78.45 a barrel, while U.S. crude fell 41 cents to $73.66 at 1233 GMT.

Reporting by Nell Mackenzie and Dhara Ranasinghe; Editing by Amanda Cooper, Alison Williams and Christina Fincher

Our Standards: The Thomson Reuters Trust Principles.

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Senior correspondent on the London markets team covering European sovereign bond markets and big macro and financial themes.

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