Stock slide on rate cut expectations, Middle East uncertainty
Stock markets mostly fell as investors continued to roll back expectations of lower interest rates, even as they juggled conflicting comments from central bankers and rising tensions in the Middle East.
Oil initially rose, but then retreated over concerns about economic growth. The dollar gained against most of its rivals.
"Stocks are lower across the board on Tuesday and the key driver is the revaluation of rate cut expectations," said Kathleen Brooks, research director at XTB.
New York had been closed Monday for Martin Luther King Day and stocks opened lower Tuesday, before recovering somewhat around midday after Federal Reserve Governor Christopher Waller, a noted dove, told a conference in Washington that the Fed is "within striking distance" of reaching its long-term inflation target, and could begin cutting interest rates this year.
Meanwhile, ECB governing council member Robert Holzman said on Monday in Davos that there is a possibility of no rate cuts this year as he pushed back against expectations of an April cut, according to Fawad Razaqzada, an analyst at FOREX.com.
London, Paris, Frankfurt all closed lower.
Equities in Europe and North America soared at the end of 2023 as softening inflation led investors to expect the Federal Reserve was preparing to reverse more than a year of hikes to US interest rates, and that The European Central Bank and Bank of England could soon follow.
Expectations had once been that central banks could cut rates as soon as March, but those hopes faded in January with Fed officials saying they were keen to keep rates steady until inflation is firmly back under their target.
"The weakness we saw in European markets yesterday has carried over as the continued pushback on rate cut expectations from central banks has served to boost the US dollar as well as undermine confidence in risky assets, as concerns over the economic outlook grow," said Michael Hewson, chief market analyst at CMC Markets.
The prospect that rates would stay higher than previously expected has lent support to the dollar, which made strong gains Tuesday against its main rivals.
While inflation is on a general downward path, there is a worry that it could pop back up anytime, particularly with tensions in the oil-rich Middle East putting key trade routes at risk.
The United States and Britain have in recent days launched strikes against Yemen's Huthis in retaliation for the Iran-backed rebels' attacks on Red Sea shipping in what they say is solidarity with Gaza.
The strikes have been met with warnings of retaliation from the group, which on Monday hit a US-owned cargo vessel with a missile. A Greek-owned cargo ship was also hit by a missile on Tuesday.
Shell has suspended Red Sea transits indefinitely and Qatar said that shipments of LNG would be delayed due to the unrest.
Oil prices rose initially on fears of a wider Middle East conflict, but then retreated over demand worries as the global economy struggles.
"The reaction in the oil markets has been fairly muted so far, however, the attacks are a warning sign that supply disruptions could come back to haunt the market," said XTB's Brooks.
Some fundamentals continued to be positive.
China's Premier Li Qiang on Tuesday said his country's economy was expected to have grown by a stronger than expected 5.2 percent last year.
And Goldman Sachs on Tuesday said fourth quarter profits jumped 58 percent to $1.9 billion on strong equity trading.
- Key figures around 1630 GMT -
New York - Dow: DOWN 0.5 percent at 37,404.71 points
New York - S&P 500: DOWN 0.2 percent at 4,772.67
New York - Nasdaq: FLAT at 14,961.75
London - FTSE 100: DOWN 0.48 percent at 7,558.34 (close)
Paris - CAC 40: DOWN 0.2 percent at 7,398.00 (close)
Frankfurt - DAX: DOWN 0.3 percent at 16,571.68 (close)
EURO STOXX 50: DOWN 0.2 percent at 4,446.51 (close)
Tokyo - Nikkei 225: DOWN 0.8 percent at 35,619.18 (close)
Hong Kong - Hang Seng Index: DOWN 2.2 percent at 15,865.92 (close)
Shanghai - Composite: UP 0.3 percent at 2,893.99 (close)
Euro/dollar: DOWN at $1.0882 from $1.0952 on Monday
Dollar/yen: UP at 147.04 yen from 145.77 yen
Pound/dollar: DOWN at $1.2659 from $1.2737
Euro/pound: DOWN at 85.96 pence from 85.98 pence
Brent North Sea Crude: DOWN 0.1 percent at $78.05 per barrel
West Texas Intermediate: DOWN 0.5 percent at $72.24 per barrel
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C.P.Wilson--RTC
