Asian stock markets experienced a broad decline on Monday, while the dollar surged to a 14-month high following a stronger-than-expected U.S. payrolls report. The report pushed bond yields higher, putting pressure on already elevated equity valuations as the earnings season begins.
The latest market turmoil follows a sharp shift in investor sentiment after the U.S. labor market report, which has caused many to reassess the Federal Reserve’s stance on interest rates. With expectations for rate cuts this year drastically reduced, markets are now focused on upcoming U.S. consumer price index (CPI) data, set for release on Wednesday. Any rise in the core CPI greater than the anticipated 0.2% could eliminate hopes for further easing.
Global oil prices also spiked to four-month highs, fueled by declining crude shipments from Russia amid heightened U.S. sanctions, contributing further to the market’s uncertainty. Additionally, data revealed that China’s exports saw a significant increase in December, while imports also rebounded, signaling resilience in the world’s second-largest economy, despite growing trade risks with the incoming U.S. administration.
The Federal Reserve’s shift in tone has dramatically altered expectations, with only a modest 27 basis points in anticipated rate cuts for 2025, down from prior hopes of a more significant reduction. The Fed’s new forecast now projects a rate closer to 4.0% rather than the 3.0% many had expected a year ago.
Aditya Bhave, deputy chief U.S. economist at Bank of America, commented on the shift, stating, “Following the strong jobs report, we now believe the rate-cutting cycle is over. Inflation remains stubbornly above target, with upside risks.” Bhave also emphasized that the focus may soon shift toward potential rate hikes if inflationary pressures persist, particularly if the core personal consumption expenditures (PCE) index exceeds 3%.
As markets adjust to these developments, 10-year U.S. Treasury yields surged to their highest levels in 14 months, hitting 4.79%. The yields were last seen at 4.764% in Asia. The increase in bond yields makes debt more attractive, which in turn raises the bar for equity valuations and corporate earnings.
The climb in yields and the shift in rate expectations come at a challenging time for businesses, particularly with concerns over the impact of tariffs under President-elect Donald Trump’s administration. These factors have left many questioning the outlook for corporate earnings, which will be under scrutiny when major U.S. banks, including Citigroup, Goldman Sachs, and JPMorgan, report their results this week.
European markets followed suit, with S&P 500 futures down by 0.4% and Nasdaq futures dropping 0.5%. The Eurostoxx 50 and FTSE futures both fell 0.2%, while DAX futures remained almost unchanged. Trading volume was light, with Japan on holiday and MSCI’s broadest index of Asia-Pacific shares outside Japan declining 0.4%.
In South Korea, stocks fell by 1.0% as the political landscape remained volatile with an upcoming Constitutional Court hearing that will decide the fate of the country’s impeached president, Yoon Suk Yeol. Meanwhile, Chinese blue-chip stocks dropped by 0.2%, despite a surprise 10.7% surge in exports and a modest 1% increase in imports. This surge helped push the December surplus with the U.S. to a record $105 billion, raising tensions regarding future U.S. tariffs on Chinese goods.
To counter a weakening yuan, China’s central bank took steps to relax borrowing rules and issued verbal warnings, while the market also anticipates upcoming data on China’s GDP, retail sales, and industrial output later this week.
The strengthening dollar continued to dominate, with the euro sliding to a new low of $1.0210, marking its eighth consecutive week of declines. The dollar index rose by 0.2% to 108.94. Meanwhile, sterling fell to a fresh 14-month low of $1.2129, weighed down by concerns over the UK’s fiscal policies and a rout in the gilt market.
Gold remained resilient in the face of rising yields, trading firmly at $2,686 per ounce. Oil prices continued to climb, with Brent crude rising $1.19 to $80.94 per barrel, and U.S. crude gaining $1.27 to reach $77.84, driven by concerns over supply disruptions from Russia.
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