World Markets Extend Losses as Investors Reassess Rate Paths and Geopolitical Environment

Barry Adams
17 Jan, 2024
New York City

U.S. stock extended yesterday's losses as investors debated rate paths and worried about the rising geopolitical tensions in the Middle East.

The S&P 500 index and the Nasdaq Composite futures declined 0.7%, and investors reassessed their rate-cut outlook after policymakers in the U.S. and Europe pushed back against expectations.

Moreover, the prospect of a wider war in the Middle East also sapped market enthusiasm after Iran launched missile attacks in Syria, Iraq, and Pakistan.

Houthi rebels backed by Iran also continued their attacks on merchant ships traveling through the Red Sea, forcing most shipping companies to divert shipments along the coast of Africa, increasing costs and shipment times.

China reported the slowest economic growth in nearly three years, and GDP expanded at a slower-than-expected 5.2% in 2023, following the growth of 3.0% in 2022.

China's retail sales growth of 7.0% fell short of market expectations, but industrial output accelerated to 6.8%, reaching a 22-month high in December.

China-exposed stocks traded down after the release of economic updates, and the Hang Seng index plunged 3.7% in Wednesday's trading.

Closer to home, U.S. retail sales were ahead of market expectations, suggesting resilient consumer spending and denting hopes of aggressive rate cuts from the Federal Reserve.  

On Tuesday, Federal Reserve Governor Chris Wallace warned that investors may be too optimistic about the easing of monetary policy in the near term.

 

U.S. Retail Sales Advanced In December 

Retail sales, adjusted for seasonal and calendar factors but not price changes, increased 5.6% from a year ago in December, the U.S. Census Bureau reported Wednesday.

Retail sales rose the most in eleven months, following a downwardly revised 4% rise in November.

Retail sales, unadjusted for price changes or inflation, increased 3.2% in the full year 2023.

 

U.S. Mortgage Applications Rebound  

Mortgage applications surged 10.4% in the week ending January 12, faster than 9.9% in the previous week, the Mortgage Bankers Association reported Wednesday.

Mortgage applications to purchase a new home jumped 9% from the 6% increase the previous week, and applications to refinance a home loan advanced by 11% as lower rates lured home buyers back to the market.

The average contract rate for 30-year fixed-rate mortgages with loan balances of less than $726,200 decreased to 6.75% from 6.81% with a down payment of 20% and points rising to 0.62 from 0.61.

 

Commercial Property Mortgage Delinquency Rate Advanced

The delinquency rate for mortgages backed by commercial properties rose in the fourth quarter of 2023, MBA reported in a separate report released on Wednesday.

Delinquency rates jumped to 6.5% of balances for loans backed by office properties and to 6.1% for lodging-backed loans.

Delinquencies for loans backed by retail properties remain elevated at 5.0%, matching the rate from the previous quarter and staying elevated since the onset of the pandemic.

About 96.8% of outstanding loan balances were current or less than 30 days late at the end of the third quarter, down from 97.3% at the end of the third quarter of 2023.

 

U.S. Indexes and Yields

The S&P 500 index decreased 0.8% to 4,730.33, and the Nasdaq Composite fell 1.1% to 14,789.22.

The yield on 2-year Treasury notes increased to 4.29%. 10-year Treasury notes advanced to 4.07%, and 30-year Treasury bonds edged up to 4.29%.

WTI crude oil decreased $0.41 to $71.98 a barrel, and natural gas prices decreased 6 cents to $2.83 a thermal unit.

Gold decreased by $23.68 to $2,004.10 an ounce, and investors debated the future interest rate path.

The dollar index, which weighs the U.S. dollar against a basket of foreign currencies, edged lower to 103.40.

 

U.S. Stock Movers

Charles Schwab decreased 1.3% to $63.51 after the financial services provider reported better-than-expected earnings but revenue fell short of market expectations.

U.S. Bancorp gained 0.3% to $41.49 after the regional bank reported lower-than-expected quarterly earnings.

China-linked stocks continued to drift lower for the second week this year after economic growth in the fourth quarter was below expectations.

JD.com, PDD Holdings, Alibaba Group Holdings, and Tencent Holdings declined between 4% and 6%.

 

European Markets Fall After Near-term Rate-cut Hopes Faded 

Stock market sentiment in Europe turned negative after policymakers in the region pushed back against the timing of rate cuts.

Moreover, market sentiment was weak at the opening after China's GDP in the fourth quarter expanded at a slower-than-expected pace of 5.2% in the fourth quarter.

China's GDP for 2023 also rose at the same rate of 5.2%, the slowest pace in three decades amid a protracted property crisis, weak consumer spending growth, and global uncertainties.

While China's economy is still growing at a faster rate than the economies of the eurozone and the U.S., growth has steadily declined from as high as 7% enjoyed in the 2010s.

Benchmark indexes in Frankfurt, Paris, and London declined more than 1% on the economic uncertainties and interest rate outlook.

 

UK Consumer Inflation Accelerated In December

The UK's annual inflation in December rose to 4% from 3.9% in November, the Office for National Statistics reported on Wednesday.

Inflation perked up for the first time in ten months after prices of tobacco and alcohol jumped 12.9% from 10.2%, reflecting a higher duty on tobacco, and recreation and culture inflation advanced to 5.7% from 5.2% in the previous month, respectively.

However, inflation for food and non-alcoholic beverages eased to 8% from 9.2% and for restaurants and hotels to 7% from 7.5%.

 

Europe Indexes and Yields

The DAX index decreased 0.8% to 16,431.69, the CAC-40 index fell 1.1% to 7,318.69, and the FTSE 100 index dropped 1.5% to 7,446.29.

The yield on 10-year German bonds edged up to 2.23%; French bonds inched higher to 2.76%; the UK gilts edged higher to 3.87%; and Italian bonds increased to 3.84%.

The euro edged lower to $1.087, the British pound inched lower to $1.267, and the U.S. dollar eased to 86.21 Swiss cents.

Brent crude advanced $0.97 to $77.34 a barrel, and the Dutch TTF natural gas decreased by €1.83 to €27.83 per MWh.

 

Europe Stock Movers

Just Eat Takeaway.com NV decreased 0.4% to 1,139.0 pence in a weak market after the food delivery company lifted its full-year core profit outlook.

Enel SpA declined 1.9% to €6.62 after the company launched a €1.75 billion bond offering.

Antofagasta plc declined 2.6% to 1,579.50 pence after the mining company released its annual production estimates.

Wizz Air Holdings fell 3.4% to 1,952.14 pence after the discount airline said it would pay an additional £1.2 million to customers in compensation.

Renault SA dropped 1.8% to €33.85 in a weak market, and the automaker reported a rise in global sales volume.

Luxury fashion houses with significant sales in China declined after China's economy expanded at the slowest pace in nearly three decades.

Kering SA declined 2.6% to €349.55, LVMH dropped 2% to €652.90, and Hermes International fell 1.1% to €1,805.20.

888 Holdings PLC dropped 7.4% to 75.03 pence after the international sports betting and gambling company reported weak revenue in the fourth quarter and fiscal 2023.

 

Asian Stocks Under Pressure 

Stocks in Asia dropped sharply after China reported weaker-than-expected GDP growth and Iran launched drone strikes in Pakistan, Syria, and Iraq as the Israel-Hamas war spiraled into a wider war in the Middle East.

The Nikkei index in Tokyo edged up 0.2% to 35,671.79, the ASX index in Sydney fell 0.3% to 7,393.10, and the KOSPI index dropped 2.3% to 2,440.10.

 

Hong Kong Stocks Drop 3% After China Growth Falls Short of Expectations  

Market indexes in China declined sharply after a government report showed the economy expanded at a slower-than-expected pace and home prices fell.

The weaker-than-expected growth rate raised the prospect of downward earnings revisions.

The Hang Seng Index in Hong Kong plunged 3.2% to 15,362.56, and the CSI 300 index dropped 1% to 3,268.69.

GDP in the fourth quarter expanded 5.2% from the previous year and rose at the same rate in the full-year 2023, the National Bureau of Statistics reported Wednesday.

The economy accelerated in the fourth quarter after expanding by 4.9% in the third quarter.

In full-year 2023, the economy expanded at a faster pace than the 3% increase in 2022, but expectations of faster growth at the start of the year ran high.

Protracted property market slumps and weak growth in consumer spending held back the economy from recovering from the pandemic era.

Economists and investors were anticipating China's economy to expand at a faster pace of 5.3% to 5.5% in the fourth quarter.

Retail sales in December rose 7.4% from a year ago, and industrial output accelerated to 6.8% in the month from 6.6% in the prior month, the statistics bureau noted in separate reports released Wednesday.

New home prices in major cities in mainland China declined by 0.45% from the previous month, the sharpest decline since February 2015.

Alibaba Group, Tencent, and JD.com declined between 3% and 4%, and property developers extended losses of 4% after new home prices fell.

Longfor Group, China Resources Land, and China Overseas Land declined between 4% and 6%.

 

India Stocks Drop 2% After Iran Attacked Pakistan 

Iran conducted a "combination of missiles and drone strikes" targeting bases belonging to the Jaysh al-Dhulm, also known as the Jeysh al-Adl terrorist group, on Tuesday.

Iran said in mid-December that Jaish al-Adl stormed a police station in Sistan and Balouchestan province’s city of Rask, southeast of Iran, killing 11 Iranian police forces, according to Iran's state-aligned Tasnim news agency report today.

On Monday, Iran launched missile attacks in northern Iraq and Syria, and Iran-backed Houthi rebels stepped up their attacks in the Red Sea.

The prospect of a wider war disrupting crude oil supplies and merchant ship passage in the Red Sea kept investors in India and Asia on edge.

In Mumbai trading, the Nifty and Sensex indexes dropped as much as 1% in early trading after Iran conducted strikes in the southwest Baluchistan province of Pakistan.

The Nikkei index in Tokyo edged up 0.2% to 35,671.79, the ASX index in Sydney fell 0.3% to 7,393.10, and the KOSPI index dropped 2.3% to 2,440.10.