LONDON/SYDNEY (Feb 3): A global stock rally, powered by hopes of central banks ending aggressive rate rises, ran into roadblocks on Friday (Feb 3) following weak earnings from US tech giants and as key US jobs data loomed.
The MSCI World Stock Index slipped 0.2%, but was still near its highest since last August following a sharp rebound in recent weeks on hopes that central bank rate hikes are nearing an end.
Wall Street stock futures fell sharply, with contracts on the tech-heavy Nasdaq 100 declining 2%, on disappointing earnings from Google, Apple and Amazon. S&P 500 futures slid 0.9%.
Investors are also watching the fallout from this week's plunge in shares of India's Adani group, which continued to nosedive on Friday with market losses amounting to US$115 billion in the wake of a US short-seller's report.
In Europe, the Stoxx 600 share benchmark fell 0.6%. Germany's benchmark 10-year bond yield inched 2 basis points (bps) higher to 2.097%, having on Thursday dropped by the most since 2011 as the price of the debt rallied.
This week, the US Federal Reserve, the European Central bank (ECB) and Bank of England (BOE) all increased benchmark borrowing costs and warned of more hikes to come.
Markets initially shrugged off the hawkishness, however, and clung to a statement by Fed chair Jay Powell on Wednesday that the US was in the early stages of "disinflation".
The mood turned much more cautious on Thursday, however, as US tech shares took a beating in US after-hours trading.
Apple projected another revenue decline in the start of the year, Amazon warned that its operating profit could fall to zero in the current quarter, and Google parent Alphabet missed expectations in its fourth-quarter profit and revenue.
The keenly watched US non-farm payrolls report, due out later on Friday, could now be crucial to supporting the recent rally.
"If we are seeing an easing of net job creation that would allow the Fed to just do one more rate hike of 25 basis points and that would be the end of the cycle," said Willem Sels, global chief investment officer at HSBC's private bank.
"We will see headwinds from further earnings downgrades, but we have incorporated quite a lot [of this] already so I think markets can hold here if we are indeed right on the Fed."
US job growth likely remained strong in January, with economists polled by Reuters expecting 185,000 new jobs were created last month.
Hourly wages are predicted to have risen by 0.3% from the month before, although the unemployment rate is also forecast to have ticked up to 3.6% from 3.5%, which may give the Fed comfort that wage inflation could decline.
Alan Ruskin, macro strategist at Deutsche Bank, said that given the current market price action ahead of the US payrolls data, a softer report would be regarded as endorsing all the favourite trades of the year.
"Not least it would provide the most important evidence to date to suggest that the market's rates pricing is more appropriate than the Fed's own more hawkish signalling," Ruskin said.
Futures markets favour another 25 bp hike from the Fed in March and imply that might be the end of its current tightening cycle. They have also priced in two rate cuts by the end of this year, a scenario Powell dismissed.
In currency markets, the euro extended losses to US$1.0888, pulling further away from Thursday's 10-month top of US$1.1033.
Sterling fell to US$1.2185 on Friday, the lowest in more than two weeks, after tumbling 1.2% the previous session.
That helped the US dollar to recoup most of its post-Fed losses, with the dollar index now standing at 101.94, away from its nine-month low of 100.80.
Treasury yields held largely steady. Ten-year Treasury yield were flat at 3.96%, while the two-year yield, which rises with traders' expectations of higher Fed fund rates, rose 2 bps to 4.106%.
In the oil market, Brent crude futures reversed earlier gains and slid 0.6% to US$81.58 per barrel, while US West Texas Intermediate (WTI) crude was also down 0.6% at US$75.28.