European stocks fell and US futures were muted on Monday ahead of a potentially pivotal week for global financial markets, with central banks on both sides of the Atlantic expected to signal a big shift in their fight against inflation by slowing the pace of interest rate rises.
The regional Stoxx Europe 600 opened 0.6 per cent lower in early dealings and London’s FTSE 100 lost 0.3 per cent. Contracts tracking Wall Street’s benchmark S&P 500 and those tracking the tech-heavy Nasdaq 100 traded in a tight range.
The moves come ahead of key monetary policy meetings at the US Federal Reserve, the Bank of England and the European Central Bank, all of which are forecast to raise interest rates at a slower pace when they meet separately later this week, despite stubbornly high rates of inflation.
Investors are also looking ahead to the release of November’s US consumer price index figures and the Fed’s latest economic projections on unemployment, gross domestic product and inflation, with traders on the lookout for hints on where US interest rates will settle later this year, and when they might eventually begin to fall.
Markets are pricing in that the Fed’s main policy rate will crest at about 5 per cent next spring before falling in the second half of the year as inflation moves slowly back towards the central bank’s 2 per cent target.
“We do feel that market consensus still underappreciates the risk of inflation staying higher longer and also is dangerously second-guessing the Fed in terms of [second half of 2023] rate cuts,” said Chris Turner, global head of markets at ING.
Events this week will determine whether investors begin next year focused on inflation or the threat of recession, Turner added.
The dollar strengthened on Monday, rising 0.2 per cent against a basket of six international peers. The world’s de facto reserve currency has tumbled more than 8 per cent since September, however, largely on hopes that inflation has peaked in the US and as China has begun to ease its strict zero-Covid policies.
Asian equities kicked off the week lower, with Chinese technology and property stocks leading losses, having rallied at the end of last week.
Hong Kong’s Hang Seng index fell 2.2 per cent while China’s CSI 300 lost 1.2 per cent and South Korea’s Kospi lost 0.6 per cent. Japan’s Topix shed 0.2 per cent.
The Hang Seng Mainland Properties index, which tracks some of China’s largest developers, fell 7.5 per cent, while the Hang Seng Tech index lost 4.1 per cent. Country Garden Services, a spinout of China’s biggest real estate group, fell as much as 17 per cent, while search engine company Baidu shed 7 per cent.