Global markets torn as investor pessimism grows over potential U.S. interest rate cuts

Asian shares displayed a mixed performance on Thursday as investor pessimism grew regarding the likelihood of an imminent interest rate cut in the United States.

Japan’s benchmark Nikkei showed minimal change, edging down by less than 0.1% to close at 35,466.17. Australia’s S&P/ASX 200 declined by 0.6% to 7,346.50, while South Korea’s Kospi gained 0.3% to reach 2,442.99. Hong Kong’s Hang Seng reversed earlier losses and increased by 0.6% to 15,369.59, but the Shanghai Composite fell by 1.0% to 2,805.55.

On Wall Street, a decline followed another signal suggesting that optimism about the Federal Reserve’s timing for interest rate cuts might have been overly optimistic. The S&P 500 dropped 26.77 points, or 0.6%, closing at 4,739.21, marking the second consecutive stumble after concluding its 10th winning week in the last 11 near its all-time high.

The Dow Jones Industrial Average slipped 94.45 points, or 0.3%, to 37,266.67, and the Nasdaq composite declined by 88.73 points, or 0.6%, closing at 14,855.62.

Increasing yields in the bond market once again exerted downward pressure on stocks. Yields rose following a report indicating stronger-than-expected sales at U.S. retailers in December. While positive for an economy defying recession predictions, this could maintain upward inflation pressure, prompting the Federal Reserve to delay interest rate cuts. This delay could alleviate pressure on the economy and the financial system while boosting investment prices.

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The 10-year Treasury yield immediately rose after the retail sales report, climbing from 4.06% to 4.10% on Wednesday. Higher yields can impact company profits and make investors less willing to pay high stock prices. High-growth stocks, including Tesla and Amazon, experienced declines, weighing on the S&P 500.

The yield on the two-year Treasury, closely tracking Fed expectations, also increased from 4.22% to 4.34% as traders adjusted their expectations for the first rate cut, now with less than a 60% probability in March, down from around 70% a month earlier.

The head of the European Central Bank cautioned against the risks of prematurely cutting interest rates, a significant factor influencing stock prices. Additionally, weaker-than-expected corporate results from companies like U.S. Bancorp, Big 5 Sporting Goods, and Spirit Airlines, under pressure after a blocked acquisition by JetBlue Airways, contributed to market concerns.

In energy trading, benchmark U.S. crude rose by 54 cents to $73.10 a barrel, while Brent crude, the international standard, added 34 cents to reach $78.22 a barrel. In currency trading, the U.S. dollar edged down to 147.85 Japanese yen from 148.11 yen, while the euro rose to $1.0906 from $1.0886.