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Stocks and bonds fell on Friday, deepening one of the worst starts to the year in the past decade for global markets as hopes that interest rates will soon be cut have dimmed in the face of stronger economic data and warnings by policymakers.
The rates rethink has left global bond markets down 1.36 per cent this week, their worst start to a year in 14 years and on track for the steepest weekly fall since May, as measured by the Bloomberg Global Aggregate index. Bond prices fall as yields rise.
In New York, both the S&P 500 and the Nasdaq Composite indices are suffering their third weakest starts in the past decade. The falls are expected to extend on Friday following strong jobs figures, which strengthened fears that a robust economy would persuade the Federal Reserve to keep interest rates higher for longer.
US employers added 216,000 jobs last month — more than the 170,000 predicted by economists. Shortly after the data, futures contracts implied the S&P 500 would open 0.4 per cent lower. The benchmark 10-year Treasury initially jumped 0.08 percentage points to 4.10 per cent, but eased to 4.05 shortly after.
In Europe, the region-wide Stoxx Europe 600 was off almost 1 per cent even after closely watched eurozone inflation numbers came in slightly below expectations.
The shift in sentiment has been abrupt after a rally into year-end on rising expectations that where the Federal Reserve would lead with interest rate cuts in 2024, Europe’s generally weaker economies would force its central banks to follow.
But the minutes of the Fed’s last meeting, published on Wednesday, painted a more hawkish picture than many had hoped, leading investors to lower expectations for any imminent easing.
Last quarter’s “everything rally” has hit a wall as a result. “Experience suggests that after a party, there is normally a bit of a hangover to follow,” said Mark Dowding, chief investment officer at RBC BlueBay.
He added that hopes of a so-called soft landing for the US economy, in which inflation falls back to around the Fed’s 2 per cent target without triggering a recession, risked being “disappointed if data do not conform conveniently to this narrative”.
Fed funds futures contracts have retreated from pricing in a 90 per cent chance of the first rate cut coming in March to roughly a two-thirds bet currently. While the Fed’s rate-setters have forecast three quarter-point rate cuts over the next 12 months, markets have priced in at least five.
Tech stocks have led the way during the current sell-off with Apple tumbling more than 5 per cent — wiping out $165bn in market value — in the first three days of trading after receiving two analysts’ downgrades, including a rare sell rating.
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