A slight recalibration of interest rate cut hopes, background geopolitical jitters, a big week for U.S. labor stats and heavy new year corporate debt sales all combined to blow froth off year-end markets as 2024 splutters into action.
The lack of any consensus about just why the first trading sessions of the new year were so downbeat suggests no one driver and points more to a marginal reset of pre-holiday euphoria as investors seek out new themes and narratives.
Even though U.S. interest rate futures have pulled back a bit from their more aggressive expectations of Federal Reserve rate cutting this year, there's still 145 basis points of easing priced by the end of the year and an 80% chance a first quarter point cut comes in March.
Whether or not that's still overblown will be informed by the release later today of minutes from the last Fed meeting that lit the touch-paper for the year rally. Any sense in there that markets over-interpreted policymaker signals could dampen the mood.
And it's also another huge week for updates on the still-tight U.S. labor market, with the December employment report due on Friday after unexpected strength the prior month. November job opening numbers gets the ball rolling on Wednesday.
A forecast uptick in euro zone headline inflation is also expected in flash data for December later this week.
The upshot for Treasuries has been a 10bp reversal in 10-year yields since the final day of 2023 to just under 4.00%.
New year U.S. corporate debt sales were cited as a possible headwind for bonds markets this week, with more than half of the expected $60 billion of new borrowing this week coming to market already, though that is in line with the past two years.
The dollar has been a big beneficiary of the rebound in rates, with its index hitting the highest since Dec. 21. This week's destructive earthquakes in Japan have seen the yen slip back too.
Geopolitical jitters rumbled over the Middle East conflict, after Israel was reported to have killed Hamas deputy leader Saleh al-Arouri in a drone strike in Beirut - raising concerns about an expansion of the violence in Lebanon.
And worries about attacks on Red Sea shipping and its impact on supply chains smoldered too after Denmark's Maersk and German rival Hapag-Lloyd said on Tuesday they would continue to pause all cargo shipments through the Red Sea following a weekend attack on one Maersk's ships.
Crude oil prices, however, fell to their lowest since Dec. 13 and are still clocking annual losses of 10% - more worried about global demand after another series of mixed or downbeat Chinese business readings.
With elections in Taiwan this month upping the political anxiety there, Morgan Stanley noted that global long-only funds offloaded Chinese equities at the fastest pace of 2023 in December as they rushed to meet redemption requests and to diversify away from the world's second-largest economy.
Chinese stocks fell again along with regional shares on Wednesday, although Tokyo stock markets remained closed.
European stocks followed suit, with S&P500 futures in the red ahead of the open after losing about 0.5% on Tuesday.
Computer chip equipment maker ASML fell 2.1%, down for the second day following the Dutch government's partial revoking of an export license for some China shipments.
Ryanair lost 2.9% after multiple online travel agents stopped selling its flights in early December and after a traffic numbers update.
Key diary items that may provide direction to U.S. markets later on Wednesday:
* U.S. Dec ISM manufacturing survey, Nov JOLTS job openings data
* Federal Open Market Committee publishes minutes from its meeting of Dec 12-13
* Richmond Federal Reserve President Thomas Barkin speaks
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