European Stocks Echo Drop in Asia Before PCE Data: Markets Wrap
(Bloomberg) — European stocks fell following another weak session in Asia as traders grappled with a softening outlook for Federal Reserve interest rate cuts and the threat of a US government shutdown.
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Europe’s Stoxx 600 weakened 1% to set the index on course for its worst week in three months. A key gauge of Asian shares dropped for a sixth day, its longest losing streak since April. S&P 500 and Nasdaq 100 futures contracts fell 0.8% and 1.2% respectively, leaving US markets poised to extend a pullback since Wednesday’s selloff.
Volatility has jumped in recent days following the Fed’s hawkish pivot, as traders question whether this year’s tech-fueled rally has sufficient momentum to extend further in a higher rates environment, despite a resilient US economy. Attention is now shifting to Friday’s personal consumption expenditures data for November, the Fed’s preferred measure of underlying inflation.
“It’s difficult to see where you get the upside surprise from,” Henry Allen, macro strategists at Deutsche Bank AG, told Bloomberg TV. “If the Fed does become more hawkish, we know those tech sector stocks are much more sensitive to rates. That’s potentially a real risk for that broader group and the broader equity market.”
The swaps market is implying between one and two quarter-point reductions for 2025, a decrease from a month ago when two cuts were fully priced. Treasuries were steady after the 10-year yield rose Thursday to 4.57%, a level last seen in May. A Bloomberg gauge for the dollar was on course for its best week in a month.
Concerns are also growing about the implications of the Republican-led House rejecting a temporary funding plan backed by President-elect Donald Trump on Thursday, with a US government shutdown looming in just over 24 hours.
The development can “inevitably increase the market volatility in the short term, especially after Fed’s hawkish pivot two days ago,” Jasmine Duan, a senior investment strategist at RBC Wealth Management Asia, told Bloomberg TV. Investors face risks from “potentially more sticky inflation and also the debt issue in the US,” she said.
Friday’s US options expiration, that has historically stoked turbulence, offers a final hurdle to end-of-year calm. The quarterly “triple-witching” will see some $6.5 trillion worth of options tied to individual stocks, indexes and exchange-traded funds fall off the board, this year’s largest, according to an estimate from derivatives analytical firm Asym 500.
