Dollar posts big gains, U.S. stocks buck global rally

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Global stocks rise, but Wall Street declines

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The correlation with the dollar softens

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Yen takes a breather from recent rally

LONDON/NEW YORK, Jan 3 (Reuters) – The dollar rose on Tuesday as oil prices fell, while U.S. stocks outpaced a global equity rally in a busy week macro that can offer direction on when and where US interest rates may peak.

The MSCI All-World index fell 0.5%, dragged down by losses in US stocks. The Dow Jones Industrial Average lost 0.64%, the S&P 500 fell 0.9%, and the Nasdaq Composite lost 1.3%.

Losses in US stocks were led by a 14.7% drop in electric vehicle maker Tesla after it missed Wall Street estimates for quarterly deliveries. iPhone maker Apple Inc fell 4.3% to its lowest since June 2021 after a downgrade due to production cuts in China.

The US dollar strengthened ahead of Wednesday’s release of minutes from the Federal Reserve’s latest meeting, with expectations that it will signal further policy tightening.

Oil prices in higher dollars emerged, also taking a beating from concerns about slowing global economic growth, especially after data showed

China’s factory activity slowed in December

.

“We expect the December FOMC minutes to shed additional light on Fed officials’ policy views for 2023. Note that at the meeting, the Committee indicated broad expectations for a substantially higher terminal rate this year,” TD Securities analysts said in a note.

The dollar index jumped 0.97% to 104.66.

The euro was the worst-performing currency against the dollar, falling the most since late September, after German regional inflation data showed consumer price pressures eased sharply in December, thanks in large part to government measures to curb natural gas bills for homes and businesses. .

US payrolls data this week is expected to show that the labor market remains tight, while EU consumer prices may show some easing in inflation as the energy prices fall.

“Energy base effects will bring a sizeable drop in inflation in major economies in 2023, but the tightening in key components, much of this coming from tight labor markets, will prevent a ‘pivot’ early dovish policy by central banks,” analysts at NatWest Markets wrote in a note.

They expect interest rates to rise to 5% in the US, 2.25% in the EU and 4.5% in Great Britain and stay there for the whole year. Markets, on the other hand, are pricing in a rate cut for late 2023, with fed funds futures implying a range of 4.25% to 4.5% by December.

“The thing that makes me nervous about this year is that we still don’t know the full impact of the very significant monetary tightening that has occurred across the advanced world,” Berenberg Senior Economist Kallum Pickering said.

“It takes a good year, or 18 months, for the full effect to kick in,” he said.

Central banks have expressed concern about rising wages, even as consumers have struggled to keep up with the rising cost of living and companies are running out of room to protect their profitability by raising prices. their own.

But, Pickering said, the labor market tends to lag behind the broader economy for some time, meaning there is a risk that central banks could raise interest rates by more than the economy can afford it.

“What the central banks are inducing is essentially excessive cyclicality, which is – overstimulate in 2021 and lead to an inflationary boom and then overtighten in 2022 and lead to a disinflationary recession. It’s exactly the opposite of what you want that do the central banks, “he said. .

EUROPEAN SHARE RALLY

In the markets, European shares rose on the back of gains in classic defensive sectors, such as healthcare and food and beverages. Drugmakers Novo Nordisk, Astrazeneca and Roche were among the biggest positive weights on the STOXX 600, along with Nestle

The STOXX, which lost 13% in 2022, rose 1.2%. The FTSE 100, the only major European index not to trade on Monday, rose 1.4%.

Markets for a while priced in a possible US slowdown, but were badly misled by the Bank of Japan’s shock upward move in its bond yield ceiling.

The BOJ is now considering raising its inflation forecast in January to show price growth close to its 2% target in fiscal 2023 and 2024, according to the Nikkei.

Such a move at its next policy meeting on January 17-18 would only increase speculation of an end to ultra-loose policy, which has essentially acted as a floor for bond yields globally .

The policy change boosted the yen overall, with the dollar losing 5% in December and the euro 2.3%.

The yen took a breather on Tuesday, falling 0.4% against the dollar to 130.69. The dollar earlier touched a six-month low of 129.52 yen.

Oil gave way to dollar strength, and concerns about demand in China, the world’s second-largest economy, added to the downward momentum.

A batch of surveys showed China’s factory activity fell by the sharpest pace in nearly three years as COVID infections rolled off the production lines.

“China is entering the most dangerous weeks of the pandemic,” warned Capital Economics analysts.

Brent crude lost 3% to trade around $83.32 a barrel.

(Reporting by Wayne Cole; Editing by Bradley Perrett, Sam Holmes, Chizu Nomiyama and Andrea Ricci)

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