By Nell Mackenzie and Natalie Grover
LONDON (Reuters) – Wall Street futures were flat while global shares remained red on Monday and investors, wary of central bank narratives, braced for U.S. inflation data and a corporate reporting season where robust results are needed to justify high valuations.
Geopolitical tensions were also on the radar as disruptions in the Red Sea raised shipping costs in Europe, while the Israeli conflict with Hamas threatened to spread to Lebanon.
European oil and gas stocks fell 1.9% on the STOXX 600 as crude prices dipped following sharp price cuts by top exporter Saudi Arabia and a rise in OPEC output.
Oil prices fell by over $2.25, or around 3%, after top oil exporter Saudi Arabia on Sunday cut some of their prices to the lowest level in 27 months amid competition from rival suppliers and concerns about supply overhang.
“Oil watchers are rightly questioning that the kingdom’s cut is not only aimed at quelling interference from non-OPEC supply but from its very own cartel membership,” said John Evans, of oil broker PVM.
There was more promising news from Washington where U.S. congressional leaders agreed on a $1.6 trillion spending deal aimed at averting a partial government shutdown.
Early gains during Asian trading vanished as MSCI’s broadest index of stocks slipped almost 1% after retreating 2.5% last week.
European stocks fell, extending their lacklustre start to 2024 weighed down by tepid energy shares, while a rise in government bond yields weighed on risk sentiment.
The pan-European STOXX 600 <.STOXX> was last down 0.1%, extending the previous week’s decline of 0.5%, while U.S. stock futures pointed to a flat open for Wall Street on Monday
Japan’s Nikkei was closed for a holiday, while Chinese blue chips lost 1.1% to hit near five-year lows.
The timing and scale of U.S. rate cuts remained in the driving seat.
“We foresee that continuing disinflation will eventually lead the Fed to reduce rates in May,” said Bruno Schneller, managing director at INVICO Asset Management.
“However, given the mixed signals from inflation data, policymakers are expected to hold off on easing measures until then.”
Data on Friday showed U.S. employers hired more workers than expected in December, dousing expectations of a rapid easing of interest rates. However, a survey from the Institute for Supply Management (ISM) showed activity in the services sector fell in December, pointing to a weaker economy.
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The S&P 500 lost 1.5% last week to break a nine-week winning streak, its longest since 1989. The index’s 24% rally last year means valuations are looking a little stretched, so much is riding on the upcoming results season.
Major banks including JPMorgan Chase and Citigroup <C.N> start the reporting rush on Friday with hopes high for upbeat profits. [RESF/US]
Consensus forecasts are that S&P 500 profits rose 3% on the year with Goldman Sachs expecting higher results.
Stock valuations now trade at a 4% premium to Morningstar’s fair value estimate for the first time in 18 months, said the data company in a report on Monday.
While rate cuts might produce tailwinds for corporate profit “with valuations where they are, the margin of safety available to investors is reduced,” said the note.
EYEING THE CPI
Interest rate futures markets price in around 136 basis points of U.S. rate cuts next year, compared to the Federal Reserve’s dot plot of 75 bps.
The probability of a move as early as March has been pared somewhat to a still-high 64%, and that will likely shift again depending on Thursday’s U.S. inflation data.
Forecasts are for core CPI to rise 0.2% in December, pulling annual inflation down to 3.8% and its lowest since mid-2021.
Despite expectations that the Fed’s next step would be to reduce rates, the time and extent of easing will hinge on upcoming economic data, said INVICO Asset Management’s Schneller.
“For the Fed to align with market expectations, supportive hard data is essential,” he said.
At least four Fed officials speak this week to offer their outlooks, with New York Fed President John Williams likely to be the most influential. [FED/DIARY]
Inflation data from China and Tokyo are also due this week, with analysts looking for deflation to ease a touch in China.
In currency markets, the dollar turned flat to 144.61 yen , while the euro was flat at around $1.0943, after falling 0.9% last week.
The dollar’s rally was a headwind for gold, which tipped 1.23% to $2,020 an ounce. [GOL/]
(Reporting by Nell Mackenzie; graphics by Samuel Indyk; editing by Dhara Ranasinghe and Jason Neely and Chizu Nomiyama)
