A bond rally and hopes of early rate cuts underpin gains in world shares. But the gains could be short-lived as a swarm of central bank speakers take the stage this week.
World shares were heading for a sixth straight session of gains on Monday, helped by last week’s bond rally as investors priced in earlier rate cuts in the United States and Europe. Markets imply around an 80 percent chance the European Central Bank will cut rates in April and that the Bank of Japan will ease again later this year.
The market’s shift to a more dovish outlook is partly due to a sharp decline in the two-year Treasury yield, which hit a record low of 4.86% on Thursday. It’s a sign that investors see the labor market cooling enough to prevent the need for further rate increases from the Federal Reserve, which had raised interest rates three times this year to reach its inflation target of 2 percent.
But at a Jackson Hole policy symposium in late August, Fed Chair Jerome Powell clarified that the Fed would keep its long-range goal of raising rates sustainably. Investors are also concerned that higher oil prices could push up inflation, which may force the Fed to raise rates further to get to its inflation target.
As a result, the percentage of S&P 500 stocks trading above their 200-day moving averages has narrowed to its lowest level since March. This could be a warning that the market is overbought and vulnerable to a pullback, particularly as many of its leaders have retreated in recent weeks. That includes technology giants Nvidia, Apple, and Tesla, which have all shed more than a third of their value this year.
Investors are also wary of China’s economy, which has been slowed by a coronavirus pandemic that has infected tens of thousands of people and shut factories. But a senior official on Friday signaled that Beijing would step in with more stimulus measures to try to get the economy going again.
A weakening dollar and signs of a global economic recovery also bolstered investor sentiment. But the rally in risk assets is being held back by fears about a fresh wave of cyber-attacks on banks and the growing possibility that the Ukraine-Russia conflict could escalate.
Amid the worries, traders remained cautious about tech stocks, which have primarily led the market this year. Shares of Nvidia sank nearly 13%, and Apple, Tesla, and Microsoft all fell more than 4%. The S&P 500’s index of technology shares is down almost 10% this year, and it remains below a critical support level at its 2023 high. A break below that mark could prompt a 10% correction.