European Stocks Set to Follow New York and Asia Lower Amid Delayed Rate Cut Expectations

The global financial markets are experiencing some turbulence as traders adjust their expectations for interest rate cuts by the Federal Reserve. Following strong US economic data, investors are now pushing back expectations of rate cuts to later in 2024. This shift in sentiment is impacting European stocks, which are set to follow New York and Asia lower.

In Asia, a gauge of regional equities is on pace for its worst day since May 8, with shares falling in Hong Kong, mainland China, Japan, and Australia. The index of Chinese shares in Hong Kong is on track for its worst week since January. Emerging Asian currencies are also feeling the pressure, with the South Korean won, Malaysian ringgit, and Thai baht falling against a stronger US dollar.

The recent data showing strong economic activity in the US has led to a reevaluation of the Fed’s monetary policy. Swaps now fully price the Fed’s first full quarter-point rate cut in December, compared to November just a day earlier. The Fed is likely to keep rates higher for longer as growth in service providers’ activity and manufacturing output remains robust.

The global stock rally has faltered this week as investors become less certain about the path of US interest rate cuts. The strength of the US dollar and a pause in Chinese stocks’ gains are also weighing on sentiment. Investors are closely watching the shift to a new faster settlement cycle in the US, which could trigger some failed trades initially.

In Japan, inflation eased for a second month, raising questions about the Bank of Japan’s capacity to raise interest rates further this year. The yen is trading around 157 per dollar, and markets are almost fully pricing a 10 basis point hike at the July meeting. The cooling in prices won’t deter financial markets from speculating on further BOJ policy tightening.

Overall, the global financial markets are facing uncertainty as traders navigate shifting expectations for interest rate cuts and economic data. The impact of these changes is being felt across different regions and asset classes, highlighting the interconnected nature of the global economy. Investors will need to stay vigilant and adapt to changing market conditions to navigate these challenging times.