U.S. markets are closed Monday to mark Martin Luther King Jr. Day
U.S. stock futures retreated, suggesting a recent rally in the stock market could pause this week as investors parse fourth-quarter results to see how higher interest rates are affecting major companies.
Futures tied to the S&P 500 declined 0.3% Monday, while those tied to the Dow Jones Industrial Average edged down 0.1%. Contracts tied to the tech-focused Nasdaq-100 fell 0.4%. Major international indexes mostly gained, except in Japan, where markets continued to test the central bank’s commitment to ultra-easy policy.
U.S. stock and government-bond markets were closed Monday to mark Martin Luther King Jr. Day. Major U.S. indexes have made a strong start to 2023, with the S&P 500 gaining 4.2% to start the year. Evidence of cooling inflation has convinced some investors that markets have already endured the brunt of the Federal Reserve’s interest-rate increases, giving some market participants confidence to begin buying riskier assets.
Federal-funds futures imply a 93% chance the Fed raises rates by 0.25 percentage point at its next meeting, according to CME Group–the smallest such increase since March.
Still, risks loom for financial markets. Many economists still expect higher interest rates to push the U.S. economy into a recession in the coming year. Business and academic economists polled recently by The Wall Street Journal put the probability of a recession in the next 12 months at 61%, little changed from 63% in October’s survey.
Earnings last Friday from some of America’s biggest banks showed that they are also guarding against a potential recession. JPMorgan, for example, set aside $1.4 billion for potential loan losses, while Citigroup‘s reserves grew by $640 million.
This week, investors will also receive results from Goldman Sachs and Morgan Stanley, as well as other corporate heavyweights such as Netflix and United Airlines. They will also be eyeing updates from the World Economic Forum, the annual gathering of global executives, world leaders and billionaires in Davos, Switzerland.
Another key event this week is Wednesday’s Bank of Japan meeting, with investors on the lookout for any change in its yield curve control framework—a key part of the central bank’s loose monetary policy. The BOJ said Dec. 20 that it would allow 10-year government bond yields to rise as high as 0.5%, up from a 0.25% cap. Yields traded above that level Monday, following a similar move last week. Bond yields rise as prices fall.
BOJ Gov. Haruhiko Kuroda has repeatedly said that the new cap doesn’t represent the start of a monetary-tightening cycle. But some central-bank watchers think otherwise. If the BOJ abandons yield curve control this week, the yield on 10-year Japanese government bonds could rise as high as 1%, according to estimates by Daiwa Securities strategist Eiichiro Tani.
In Japan, the Nikkei 225 stock index fell 1.1% Monday. Hong Kong’s Hang Seng ended roughly flat. In mainland China, the CSI 300 Index of the largest stocks listed in Shanghai or Shenzhen rose 1.6%.
Shares of Chinese companies have gotten a lift from policy changes including Beijing’s easing of border restrictions following the end of its zero-Covid policy. Regulators cleared Didi Global to start registering new ride-hailing customers, the Chinese company said Monday. The move, coming after steps such as a change of control at Ant Group, marks the latest sign that Beijing’s clampdown on its internet giants is coming to an end.
Still, the market has largely priced in the shift in Beijing’s stance, so foreign and long-term investors would need to see strong results before they put more money into Chinese technology stocks, said Benjamin Wong, chief investment officer of Hong Kong-based multifamily office Rockpool Capital.
In Europe, major indexes also rose, extending a stretch of recent strength for stocks in the region. The pan-continental Stoxx Europe 600 added 0.2%. The U.K.’s FTSE 100 added 0.1%, putting it within striking distance of a new all-time high.
Brent crude, the international benchmark for oil prices, declined 0.7% to $84.71 a barrel, while the WSJ Dollar Index added 0.1%
Bitcoin climbed above $20,000 to trade at about $20,818, up 5% from Friday’s 5 p.m. ET level.
