By Amanda Cooper
LONDON (Reuters) – Global stocks slid to two-month lows, while the dollar rose to its highest in over five months on Tuesday, after stronger-than-expected U.S. retail sales further reinforced the view that the Federal Reserve may not rush to cut interest rates this year.
Geopolitical tensions in the Middle East kept risk appetite in check, supporting gold and oil, while data showed China’s economy grew 5.3% in the first quarter year-on-year, easily beating analysts’ expectations.
The MSCI All-World index touched its lowest since February, as a drop in shares in Europe sent the regional down 1.3%, set for its biggest one-day fall in six months, while U.S. stock futures were mostly flat on the day.
U.S. stocks closed sharply lower on Monday as a jump in Treasury yields added to the drag on sentiment from rising tensions between Iran and Israel.
Underscoring the cautious mood, a number of measures of volatility have picked up in the last week.
The on Monday neared six-month highs, while long-dormant currency volatility has also picked up.
“There is certainly not much in the news flow to inspire risk-taking and there is a growing list of factors to refrain from buying and to manage exposures,” said Chris Weston, head of research at Pepperstone.
Meanwhile, a survey of asset managers by Bank of America published on Tuesday showed investors are at their most bullish in over two years this month and have upped their allocations to risk assets like stocks and commodities at the expense of bonds and cash.
In fact, optimism has been running so high lately, that when the survey was conducted between April 5-11, 36% of respondents said they expected a “no landing” scenario for the global economy, up from just 7% at the start of the year, Bank of America said.
The survey was also conducted before last week’s U.S. consumer inflation figures that showed price pressures remain stubbornly high, right as geopolitics threaten to muddy the outlook for the broader economy.
“The relatively strong retail sales print, a couple of months ago, would not have had the sort of impact we had yesterday and against the backdrop of rising geopolitical tensions in a number of jurisdictions, the result has been, number one: the Fed may well just keep policy on hold for some time longer,” Philip Shaw, chief economist at Investec, said.
“We’ve been nervous about a combination of relatively sticky inflation data from the United States and strong economic numbers for a while now. Eventually, economies do land. It’s just the trajectory and the amount of time it take to happen and what the market implications are,” he said.
NO RUSH
Traders now anticipate 45 basis points of cuts this year, down from more than 160 bps in expected cuts at the start of the year. Markets are now pricing in September, instead of June, as the starting point for rate cuts, according to CME FedWatch Tool.
“There is “no urgency” to cut U.S. interest rates, Mary Daly, the president of the San Francisco Federal Reserve Bank, said on Monday, with the economy and labour market strong, and inflation still above the Fed’s target of 2%.
Government bonds, which usually benefit from investor unease, have come under pressure. The yield on was last flat at 4.6303%, having hit a five-month high of 4.663% on Monday.
The dollar edged up against a basket of major currencies, supported in part by higher Treasury yields, while gold traded above $2,300 an ounce.
On the geopolitical front, Israelis awaited word on how Prime Minister Benjamin Netanyahu would respond to Iran’s first-ever direct attack on their country. Netanyahu on Monday summoned his war cabinet for the second time in less than 24 hours to weigh a response to Iran’s weekend missile and drone attack, a government source said.
Oil remained above $90 a barrel as investors weighed up how supply from the Middle East might be affected, should the situation deteriorate further. futures were last up 0.1% at $90.20, having gained over 10% in the last month alone.
In currencies, the strength of the dollar kept the yen pinned near 34-year lows, where it has traded in the past few days.
Investors believe Japanese monetary authorities could even intervene in the markets to prop up the yen if it continues to slide, as the Indonesian central bank did on Tuesday to support the rupiah, which hit four-year lows.
