Stocks slide, dollar holds steady as market assesses Fed interest rate policy

NEW YORK/LONDON, Dec 6 (Reuters) – Global stocks headed for a third straight day of losses on Tuesday and the dollar held steady as the market assesses how long the Federal Reserve will keep interest rates higher and how it is likely that politics will provoke a recession.

US equities trailed European equities lower with all sectors down except defensive utilities (.SPLRCU) which oscillated between gains and losses.

MSCI’s US-focused all-country world index (.MIWD00000PUS) fell 1.06%, on track for a third straight session of declines after hitting a three-month high last week.

Government bond yields fell, but more at the long end of maturities than at the short end, deepening the inverted yield curve, a market indicator of a looming recession. The spread between the yields of 2-year and 10-year notes was -82.6 basis points.

The market needs to recognize that a recession is most likely a reality, not just hypothetical, and that valuations need to get lower, said Jason Pride, chief investment officer of private wealth at Glenmede in Philadelphia.

“On average, during recessions, markets price at a discount to fair value, which they haven’t done,” Pride said. “There is not a single instance where a market bottomed out before the recession started.”

Data released on Monday shows that US service industry activity picked up unexpectedly in November, and last week’s robust US payroll report has cast doubt on how soon the Fed will ease monetary policy.

Futures show the market expects the Fed’s top-end interest rate to rise to 4.9951% next May, but will have fallen to 4.565% by December 2023 amid speculation that the Fed will cut rates to stimulate the economy to help recover from an expected slowdown in growth.

Wall Street was dragged down by bank stocks and Meta Platforms Inc (META.O) after European Union regulators ruled that their Facebook and Instagram units shouldn’t require users to see personalized ads based on their digital activity agree.

The Dow Jones Industrial Average (.DJI) was down 0.79%, the S&P 500 (.SPX) was down 1.19% and the Nasdaq Composite (.IXIC) was down 1.57%. In Europe, the STOXX 600 Index (.STOXX) lost 0.56%.

The dollar was broadly unchanged against the euro and yen after rising sharply on Monday, with investors awaiting the Fed’s expected 50 basis point rate hike next week.

The euro rose 0.24% to $1.0516, while the yen gained 0.22% to 136.44 per dollar.

Euro-zone government bond yields fell after two European Central Bank officials signaled inflation and rates could be near a peak ahead of a number of important central bank decisions.

The ECB, Bank of England and Fed meet next week to discuss monetary policy. The Reserve Bank of Australia gave a glimpse of upcoming decisions after raising interest rates to decade highs and maintaining a forecast of further rate hikes.

All eyes will be on next Tuesday’s release of US CPI data for November, which will provide an insight into the pace of inflation.

The US 10-year bond yield fell 4.2 basis points to 3.557%.

Oil prices fell in a volatile market as the dollar remained strong and economic uncertainty offset the bullish effects of a price cap on Russian oil and prospects of a surge in demand in China.

Crude oil futures posted their biggest daily decline in two weeks on Monday.

US crude fell 2.24% to $75.21 a barrel and Brent was at $80.70, down 2.39% on the day.

Spot gold rose 0.3% to $1,774.09 an ounce.

Reuters graphics

Reporting by Herbert Lash, additional reporting by Anshuman Daga in Singapore and Alun John in London; Edited by Simon Cameron-Moore, Angus MacSwan and Jonathan Oatis

Our standards: The Thomson Reuters Trust Principles.

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