A dose of reality for the rate cut rally By Reuters

© Reuters. FILE PHOTO: The Federal Reserve building in Washington, U.S., January 26, 2022. REUTERS/Joshua Roberts/File Photo

A look at the day ahead in European and global markets from Rae Wee

The Reserve Bank of Australia (RBA) on Tuesday joined the Federal Reserve in a chorus of caution as it pushed back against bets for imminent rate cuts, and even kept a tightening bias at the conclusion of its policy meeting.

That may now have become all too familiar for investors, who for most of the past few months had been ploughing into stocks as the Fed signalled it was finished hiking.

But policymakers warned they would take their time in making cuts, even if traders didn’t want to hear it. Then came last week’s surprise jump in U.S. employment figures, and suddenly markets are listening.

The RBA’s reticence – even after a surprise fall in inflation – prompted futures to push out the likely timing of Australia’s first easing to later in the year.

Expectations for U.S. rate cuts this year, which remain the main market driver, have in the meantime slumped from around 160 basis points (bps) a few weeks ago to 115 bps, closer to the Fed’s projection of 75 bps.

All of which has been good for a U.S. dollar that everyone had expected to fall, but not so much for equities or Treasuries, which have been aggressively sold in the past few sessions.

The greenback flirted with a three-month high on Tuesday, while the two-year U.S. Treasury yield, which typically reflects near-term interest rate expectations, was hovering near a one-month peak.

The two-year yield has risen roughly 25 bps since Friday’s blockbuster U.S. jobs report, effectively a quarter-point rate hike.

In China, moves from authorities to shore up battered Chinese stocks seemed to have put a floor under its markets, at least for now.

The country’s state fund Central Huijin Investment said on Tuesday it has expanded its scope of investment in exchange-traded funds (ETFs), according to a statement on its website.

The so-called “national team” of Chinese state-backed investors poured $17 billion into index-tracking funds last month and were piling in on Friday and Monday as markets fell, analysts said, although investors doubt that will offer sustained support.

Also on Tuesday, China’s securities regulator said it will guide institutional investors to raise stock investments and encouraged listed companies to increase share buybacks.

China’s blue-chip index rose more than 1.5% on Tuesday, while the rose nearly 1%, rebounding from Monday’s five-year low.

Key developments that could influence markets on Tuesday:

– Euro zone retail sales (December)

– UK S&P global construction PMI (January)

– Germany industrial orders (December)

– Fed’s Mester, Kashkari and Collins speak

(By Rae Wee; Editing by Edmund Klamann)

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