Stock Futures Dip While International Markets Increase

U.S. stock futures retreated on Monday, suggesting that the recent rally in the stock market could pause this week as investors parse fourth-quarter results to see how higher interest rates are affecting major companies.

Futures tied to the S&P 500 and Dow Jones Industrial Average both declined Monday, with the former falling 0.3% and the latter edging down 0.1%. Contracts tied to the tech-focused Nasdaq-100 also fell 0.4%. Major international indexes mostly gained, except in Japan, where markets continued to test the central bank’s commitment to ultra-easy policy.

U.S. stock and government-bond markets were closed on Monday in honor of Martin Luther King Jr. Day.

Major U.S. indexes have made a strong start to 2023, with the S&P 500 gaining 4.2% to start the year. Some investors believe that evidence of cooling inflation has convinced the Federal Reserve to begin buying riskier assets, giving some market participants confidence to do the same.

According to CME Group, federal-funds futures imply a 93% chance the Fed will raise rates by 0.25 percentage point at its next meeting. This would be the smallest such increase since March.

Despite the recent stock market rally, many economists still believe that a recession is likely in the next 12 months. In a recent survey by The Wall Street Journal, 61% of business and academic economists said that a recession is probable in the next year, which is only slightly lower than the 63% who said the same in October.

Last Friday, some of America's biggest banks released their earnings, which showed that they are preparing for a potential recession. JPMorgan, for example, set aside $1.4 billion for potential loan losses, while Citigroup's reserves grew by $640 million.

This week, investors will be keeping an eye on results from Goldman Sachs and Morgan Stanley, as well as other major corporations like Netflix and United Airlines. They'll also be paying attention to updates from the World Economic Forum, the annual meeting of global executives, world leaders and billionaires in Davos, Switzerland.

Investors will be closely watching the Bank of Japan's meeting on Wednesday, looking for any changes to its yield curve control framework. This is a key part of the central bank's loose monetary policy. The BOJ said on December 20th that it would allow 10-year government bond yields to rise as high as 0.5%, up from a 0.25% cap. Yields traded above that level on Monday, following a similar move last week. Bond yields rise as prices fall.

Governor Haruhiko Kuroda of the Bank of Japan has said multiple times that the new cap on government bond yields does not signal the start of a monetary tightening cycle. However, some observers of the central bank believe otherwise. If the BOJ abandons yield curve control this week, the yield on 10-year Japanese government bonds could rise to as high as 1%, according to estimates by Daiwa Securities strategist Eiichiro Tani.

On Monday, the Nikkei 225 stock index fell 1.1% in Japan. Hong Kong's Hang Seng ended roughly flat. In mainland China, the CSI 300 Index of the largest stocks listed in Shanghai or Shenzhen rose 1.6%.Chinese companies' stock prices have risen in response to policy changes including the loosening of border restrictions after Beijing ended its zero-Covid policy.

Didi Global announced on Monday that regulators have cleared the company to start registering new ride-hailing customers. This comes after steps such as a change of control at Ant Group, and marks the latest sign that Beijing is loosening its clampdown on internet giants.

Despite the shift in Beijing's stance, the market has largely priced it in, so foreign and long-term investors would need to see strong results before putting more money into Chinese technology stocks, said Benjamin Wong, chief investment officer of Hong Kong-based multifamily office Rockpool Capital.

European stocks extended their recent run of gains on Wednesday, with major indexes rising across the continent.

The pan-continental Stoxx Europe 600 index added 0.2% in early trading, while the U.K.'s FTSE 100 index rose 0.1%. The FTSE 100 is now close to its all-time high.

Brent crude oil prices fell by 0.7% to $84.71 a barrel, while the WSJ Dollar Index rose by 0.1%.

Bitcoin surged above $20,000 on Monday, trading at around $20,818. This represents a 5% increase from Friday's close. Bitcoin's price has been on a tear in recent months, with the cryptocurrency more than doubling in value since October.