Stocks stall as firm Fed message reins in China rally

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By Marc Jones and Koh Gui Qing

NEW YORK (Reuters) - U.S. stocks sank on Thursday and brought to a halt a global rally in global stocks, as upbeat American jobs data after the Federal Reserve's firm message that it won't be cutting interest rates any time soon offset China's latest reopening plans.

News that China's mainland border with Hong Kong will be reopened after three years had sent Asian-Pacific shares outside Japan to a four-month high overnight, but with both the dollar and bond market borrowing costs creeping up, Europe couldn't keep up.

The MSCI All-World index lost 0.8%. On Wall Street, the S&P 500 dropped 1.2%, the Dow Jones Industrial Average lost 1.1%, and the Nasdaq Composite dropped 1.4%.

"U.S. stock indexes appear neither cheap nor expensive enough to stir restless spirits," said Stephen Innes, a managing partner at SPI Asset Management.

"Outside of China's exuberance, investors are likely to remain relatively defensive and probably underweight bonds and stocks and reasonably neutral on commodities," Innes said, at least until the Fed's Jan. 31-Feb. 1 meeting is over.

The pan-European STOXX index ended down 0.2%, after gaining more than 3% in its first three sessions of 2023. London's FTSE 100 managed a respectable 0.6% rise as better-than-expected numbers from retail giant Next lifted the entire European sector, but it barely made up for a groggy Frankfurt and Paris. [.EU][.N]

Following the release on Wednesday of the minutes from the Fed's Dec. 13-14 meeting that showed the U.S. central bank strike a hawkish note as it stayed focused on reducing inflation, analysts said Friday's U.S. jobs report for December will be closely watched by investors. Signs of a still-tight labour market could fuel bets that more rate hikes are in the offing.

"A strong print tomorrow and I think you are going to get a fairly rapid repricing for a 50-bps (basis-point) hike at the next (Fed) meeting," said Derek Halpenny, head of research for global markets EMEA at MUFG.

Investors were already digesting their pre-payrolls appetiser, the ADP National Employment Report, which showed the private sector added more jobs in December than a month ago. It came a day after a moderate fall in U.S. job openings too.

China, meanwhile, has abruptly dropped ultra-strict curbs on travel and activity, fanning hopes that once the COVID-19 infection waves pass its giant economic motors can start firing again and offset the slowdowns in other parts of the world.

Thursday's biggest Asian gains included E-commerce and consumer stocks in Hong Kong thanks to the China mainland border news, which drove the Hang Seng to a six-month high.

The yuan also rose about 0.11% to 6.8800, a four-and-a-half-month high, and also supported other currencies such as the Thai baht which, as Thailand is now expected to see a mass return of Chinese holidaymakers, has surged nearly 14% in less than three months.

"China reopening has a big impact ... worldwide," said Joanne Goh, an investment strategist at DBS Bank in Singapore, since it not only spurs tourism and consumption but can ease some of the supply-chain crunches seen during 2022.

"There will be hiccups on the way," Goh said, during an outlook presentation to reporters. "We give it six months adjusting to the process. But we don't think it's reversible."

RATES WARNING

China's central bank also said overnight it would step up financing support to spur domestic consumption and key investment projects and support a stable real estate market.

It has eased an unofficial ban on Australian coal imports in recent days as well, and the Australian dollar made a three-week high overnight just below $0.69. It last bought $0.67700.

Oil rebounded after posting the biggest two-day loss for the start of a year in three decades. [O/R]

Brent crude was last up 1.8% to $79.20 a barrel, while U.S. West Texas Intermediate crude futures gained 2.1% to $74.37 as an unexpected shutdown of a major U.S. fuel pipeline also lifted prices. [O/R]

"This morning's rebound is due to the shutdown of Line 3 of the Colonial pipeline," said Tamas Varga of oil broker PVM. "There is no doubt that the prevailing trend is down," though he added: "It is a bear market."

Benchmark 10-year Treasury yields - which move inversely to price - were higher at 3.7144% but still down nearly 10 basis points (bps) on the week. [US/]

Germany's 10-year government bond yield was last up at 2.308%. It too though has fallen nearly 25 bps this week after closing out 2022 at its highest level since 2011. [GVD/EUR]

Preliminary inflation data from Germany, France and Spain all showed this week that consumer prices rose at a slower pace in December than November, following an easing in energy price rises.

In currency markets, the dollar index rose 0.73% to 104.97 as investors navigate between the Fed's hawkish tone and the support for riskier currencies driven by China's reopening.

It was pinning down the yen again at 133.135 per dollar, cutting the wagers that Japan's ultra-easy monetary policy will be finally tightened this year. A stronger dollar pushed the euro down 0.7% to $1.05350. [USD/]