Year-end rally stalls: stocks and bonds both see declines

European stocks are poised to mirror declines in the US and Asia, as traders temper their optimism regarding potential interest rate cuts by the Federal Reserve. Ahead of the extended Christmas weekend, market participants are adjusting their positions. Futures for Europe’s stock benchmark slid by up to 0.8% following a 1.5% drop in both the S&P 500 and Nasdaq 100 on Wednesday. The MSCI All Country World Index retreated for the second consecutive day after a robust nine-session surge. While Treasury bonds experienced a slight dip, currencies traded within narrow ranges as volatility eased with the approach of the year-end holiday season.

After a month-long rally that propelled global stocks to their 2023 peak, risk assets are paused. Overbought conditions in the US, as evidenced by relative strength indicators reaching predictive decline levels, have contributed to the selling pressure.

In Asia, Japanese stocks, led by a selloff in Toyota Motor Corp., saw notable losses, while technology-heavy markets in South Korea and Taiwan also declined. However, mainland China shares bucked the trend, poised for their best day since early November amid signs of recovery in the country’s property market. Chinese equities seemed unaffected by reports of the Biden administration contemplating tariff hikes on certain Chinese goods.

The US dollar weakened against all Group-of-10 peers as US 10-year yields hit a five-month low on Wednesday, reflecting expectations of lower Fed interest rates.

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Toyota Motor shares slumped after a safety scandal involving its subsidiary Daihatsu Motor Co., which faced a raid on its offices. The automaker also recalled 1 million cars in the US, following revelations of manipulation in collision safety test results dating back to 1989. Citigroup Inc. announced plans to exit distressed-debt trading, while Morgan Stanley explored allocating part of its balance sheet to a new private credit fund. FedEx Corp.’s diminished profits raised concerns about a potential economic downturn.

In the commodities market, oil retreated toward $74 per barrel as attention shifted from the Red Sea crisis to increased supply from US producers. Gold rose above $2,030 per ounce. Bitcoin extended gains, reaching as high as $44,294 on Wednesday, amid anticipation of the Securities and Exchange Commission’s decision on ETFs by January 10.

The upcoming Friday is potentially eventful with data releases, including UK GDP, US consumer sentiment, and the core personal consumption expenditures price index—a key inflation gauge preferred by the Fed.