Global Shares Slip as Investors Brace for US Inflation Data & Corporate Earnings Season

Global shares slipped into negative territory on Monday as investors awaited U.S. inflation data and corporate earnings reports, which will play a crucial role in justifying high valuations. Concerns over the possibility of interest rate hikes also weighed on market sentiment. Geopolitical tensions, including disruptions in the Red Sea and the Israeli conflict with Hamas, added to the cautious outlook. European oil and gas stocks tumbled by 1.8% on the STOXX 600 index as crude prices dipped following major price reductions by Saudi Arabia and increased OPEC output. While worries about escalating tensions in the Middle East persisted, oil prices fell by over 2%. Despite the uncertain market conditions, a $1.6 trillion spending deal agreed by U.S. congressional leaders aimed at avoiding a partial government shutdown brought some optimism. However, early gains in Asian trading were erased as MSCI’s broadest index of stocks declined nearly 1%. European stocks also fell, driven by weak energy shares, while rising government bond yields further dampened risk sentiment. The pan-European STOXX 600 dropped by 0.3%, extending last week’s decline. Wall Street was also expected to open weakly on Monday, with U.S. stock futures pointing to a sluggish start to the week. Japan’s Nikkei was closed for a holiday, but Chinese blue chips fell by 1.1% to hit near five-year lows. The timing and scale of U.S. rate cuts remained a major focus for investors. Some analysts predicted that dismaying inflation data could eventually prompt the U.S. Federal Reserve to reduce rates in May. However, given mixed signals from inflation data, policymakers are expected to hold off on easing measures until then. Friday’s data revealed that U.S. employers added more workers than expected in December, reducing the chances of rapid interest rate cuts. Nevertheless, a survey by the Institute for Supply Management indicated a decrease in service sector activity in December, suggesting a weaker economy. The S&P 500 suffered a 1.5% loss last week, ending a nine-week winning streak. Given the index’s 24% rally last year, investors are closely monitoring the upcoming earnings season for positive results that could help justify current valuations. Major banks such as JPMorgan Chase and Citigroup will kick off the reporting season on Friday, and analysts expect upbeat profits. Consensus forecasts suggest a 3% rise in S&P 500 profits year-on-year, and Goldman Sachs anticipates even higher results. However, analysts noted that Q4 results must exceed expectations, which have risen in recent quarters, for S&P 500 firms to beat analyst forecasts. They also emphasized the potential for upside surprises due to strong U.S. economic growth, lower interest rates, and a weaker dollar. The futures market is currently pricing in approximately 136 basis points of U.S. rate cuts in the coming year, higher than the Federal Reserve’s dot plot of 75 basis points. The probability of a rate cut as early as March currently stands at 64%, with U.S. inflation data on Thursday expected to influence future rate cut expectations. Analysts forecast a 0.2% rise in core CPI in December, pulling annual inflation down to 3.8%, the lowest level since mid-2021. The expectation of rate cuts remains, but the timing and extent of easing will depend on forthcoming economic data. INVICO Asset Management’s Bruno Schneller emphasized the importance of supportive hard data aligning with market expectations for the Fed to consider easing measures. This week, at least four Fed officials will offer their outlooks, with New York Fed President John Williams likely to have the most significant impact. Inflation data from China and Tokyo are also anticipated this week, with analysts hoping for a slight easing of deflation in China. In currency markets, the dollar weakened by nearly 0.2% against the yen, while the euro remained flat at around $1.0940, following a 0.9% decline last week. The dollar’s rally posed a challenge for gold, which dipped by 0.9% to $2,028 per ounce.