By Amanda Cooper
LONDON (Reuters) -Global stocks traded at two-year highs on Tuesday ahead of a Federal Reserve meeting, while Asian equities took a knock from the court-ordered liquidation of Chinese property giant Evergrande.
U.S. Treasuries benefited from a flurry of buying, pushing yields lower, which in turn kept the dollar in a tight range, after the Treasury Department said it would need to borrow less than it previously thought.
The MSCI All-World index was narrowly in positive territory at its highest since January 2022.
But markets are edgy as tensions in the Middle East kept oil above $80 a barrel, while investors pondered how the Evergrande Group court order might impact China’s fragile property market.
China stocks are already heading for a 4% drop this month, having hit their lowest in four years, and Chinese government bond yields are at two-decade lows, as investors hold out for the possibility of government stimulus to bolster the world’s second largest economy.
This week’s other risk events for investors include the Fed and the Bank of England’s decisions on interest rates, monthly U.S. employment data and multiple earnings, in particular from stock-market stars Apple, Microsoft and Google parent Alphabet. U.S. futures were down 0.1%.
“Markets now have a sense of paralysis. They obviously want to see what the Fed is going to say this week … and how much more is the door going to be opened to rate cuts,” Marc Ostwald, chief global economist at ADM Investor Services, said.
“To my way of thinking, the key thing at the moment – and this is where markets are also struggling – is we’re looking at a rate-cut cycle, but central banks and markets are looking at it in terms of a normal economic cycle.”
He said in the last 15 years, since the subprime crisis, all rate-cutting cycles had been triggered by some form of financial instability, rather than an economic cycle.
“We actually haven’t had a normal rate-cutting cycle in response to a change in demand and changes in the labour market for a very long time, so that’s why I partly think there is so much divergence in opinions,” he said.
The Fed in December surprised markets with a dovish tilt, projecting 75 basis points of interest rate cuts in 2024, sparking a blistering year-end risk rally.
But a flurry of strong economic data, sticky inflation and caution from central bankers have made markets reassess their expectations.
Markets expect a 47% chance of a Fed rate cut in March, the CME FedWatch tool showed, down from 88% a month earlier. They currently anticipate 134 bps of cuts in the year, compared with 160 bps of easing a month ago.
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The S&P 500 logged another record high close on Monday and that optimism fed into equity markets in Europe, where the benchmark STOXX 600 rose 0.2%, having traded at two-year peaks earlier.
The dollar retreated against a basket of currencies, down 0.1% as the euro reversed course modestly to rise 0.1% to $1.0841 after data showed the euro zone avoided recession in the final quarter of 2023.
The prospect of lower U.S. government bond supply in the first quarter of the year pushed 10-year Treasury yields down 3 basis points to 4.066%.
The yuan, which is set for its worst monthly performance against the dollar since August, was flat at 7.1.
Investors are holding out for more measures from Beijing to defend equity markets after a cut to bank reserves last week.
BlackRock Investment Institute said in a weekly note they hold a neutral stance on Chinese assets.
“We see growth on a weaker trajectory and see only limited policy stimulus from China,” they said.
Oil prices edged lower, as concern about the Chinese economy was offset by the United States saying it would take “all necessary actions” to defend American forces after a drone attack killed three U.S. troops in Jordan.
Brent crude futures were down 0.3% at $82.16 a barrel, as was U.S. crude, at $76.80.
(Additional reporting by Ankure Banerjee; Editing by Shri Navaratnam, Barbara Lewis and Chizu Nomiyama)
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