Wednesday, January 3, 2024

Oil spikes but European stocks decline

After starting the day higher because to traders' bets on central banks lowering rates in 2024, European stock markets plummeted yesterday. Meanwhile, oil prices increased following a naval skirmish in the Red Sea.

In 2023, bond yields decreased and global stock markets saw overall gains, with gains concentrated in the final two months of the year. When traders returned from their year-end vacations yesterday, the positive outlook for the market persisted, and early European trading saw the pan-European STOXX 600 reach its highest level in almost two years. The euro zone bank stocks index,.SX7E, reached its highest level since 2018.

However, the markets found it difficult to maintain their gains, and by 1210 GMT, the STOXX 600 had dropped 0.2% for the day. Both the German DAX and the London Stock Exchange's FTSE 100 had 0.2% declines.

Throughout the day, the MSCI World Equity index decreased by 0.3%.

Wall Street futures indicated drops in US market indices, with the S&P 500 futures down 0.7% and the Nasdaq futures down 1%.

Traders are keeping an eye out for cues about whether major central banks would consider inflation to have decreased sufficiently to warrant rate cuts.

Oil spikes but European stocks decline

According to Jan von Gerich, chief analyst at Nordea, "there is a feeling that (monetary) easing is coming and it seems like there is more to come in the rally in the short term."

"I believe that stocks are vulnerable to downside risks, but the current momentum is robust," he stated.

Analysts attributed the more than 2% increase in oil prices to the Red Sea tensions and expectations of robust demand from China, where investors are anticipating more stimulus measures.

Three Houthi boats were sunk and ten militants were killed as US helicopters thwarted an attack on a Maersk container ship in the Red Sea on Sunday by Houthi militants backed by Iran. Investors are assessing the possibility that the battle between Israel and Gaza could spread throughout the region and shut down vital waterways used for the transportation of oil.

US West Texas Intermediate crude increased by 2.4% to US$73.41 per barrel, while Brent crude increased by 2.4% to US$78.85 a barrel.

In a different statement, the CEO of energy company E.ON EONG stated that while Middle East unrest may cause energy costs to skyrocket, Germany's gas supply situation is still significantly better than it was following Russia's supply reduction last winter.

Chinese assets were negatively impacted during Asian trading due to data suggesting a decline in business confidence in China by 2024. The Hang Seng index in Hong Kong dropped 1.5%, while the onshore blue chip index in China sank 1.3%.

At 101.98, the US dollar index was up by 0.6%, reaching a 12-day high following a roughly 2% loss on predictions that US rates will decline last year.

The yield on the US 10-year Treasury increased to 3.9576 percent in 2023, a gain overall.

The US non-farm payrolls report, which is expected later this week, is one piece of economic data that may provide insight into the US Federal Reserve's future course of action. The minutes from the December Fed meeting are also anticipated to shed light on the central bankers' perspectives on rate reductions.

During its policy meeting in December, the Fed surprised everyone by expressing a dovish outlook and projecting 75 basis points of rate reductions by 2024. The European Central Bank (ECB) and the Bank of England (BoE), two other significant central banks, have hinted that they will maintain higher interest rates for an extended period of time.

Friday's flash inflation readings for the euro zone are expected to be "the most significant additional data point prior to the January ECB meeting," according to a note from RBC Capital Markets analysts.

The analysts stated, "Anything short of a significant increase in inflation would represent a significant surprise."

The euro dropped to US$1.0966 from the dollar by almost 0.7%.

The benchmark German 10-year yield increased 6 basis points to 2.091 percent on the day, as did the yields on government bonds issued in the Eurozone.

An ounce of gold was trading at US$2,066.1, up 0.2%.

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Oil spikes but European stocks decline