Shares lose steam as interest rate optimism fades

World shares lost steam on Tuesday as investor enthusiasm about a peak in global interest rates faded, while the Australian dollar dropped after investors bet central bank rate hikes were nearing their end.

The MSCI world equity index, which tracks shares in 47 countries, fell 0.3%. MSCI’s broadest index of Asia-Pacific shares outside Japan slipped 1.2%, snapping three straight days of gains.

Still, the broad Euro STOXX 600 turned positive after falling 0.2% in early trading.

U.S. Treasuries were broadly steady, having unwound some of the rally that followed the Federal Reserve’s decision to leave interest rates on hold last week.

Ten-year yields hovered at 4.641% – about 10 basis points (bps) above where they closed on Friday, after their biggest weekly drop since March, but well below the 5% mark touched in late October.

Wall Street was set for losses, too, with S&P 500 futures falling 0.3%.

The Nasdaq had logged a seventh straight session of gains on Monday, capping its longest streak since January, though its gain was a slender 0.3% as the rally loses momentum.

“There was quite a bit of euphoria at the end of last week on the belief that the Fed is done, the jobs market is slowing, that the U.S. economy is going to experience a soft landing,” said Michael Hewson, chief market analyst at CMC Markets UK.

“People have started to become a bit more clear eyed. There is the risk that the Fed could rise again.”

A trio of Fed officials are due to speak later in the day, with investors watching for clues on the central bank’s next moves in its attempt to tame inflation.

Fed funds futures imply only a slim chance of another hike, but bets on rate cuts next year were trimmed.

“It continues to be a tug-of-war between markets and the Fed, as the latter has suggested that higher long-end yields would … do the job of policy tightening for them,” said Nicholas Chia, macro strategist at Standard Chartered (LON:STAN).

“Markets probably fret that lower yields would force the Fed to re-think about an extended pause.”

In China, data showed imports unexpectedly grew in October, while exports contracted faster than expected, in a mixed set of indicators that showed the recovery in the world’s second-largest economy remains uneven.

Hong Kong’s Hang Seng fell 1.7%, while mainland China blue chips fell 0.4%.

AUSSIE FALLS

In currency markets, the Australian dollar fell about 0.9% to $0.6430 after the Reserve Bank of Australia announced a 25 basis point hike, as expected, taking the cash rate to a 12-year high of 4.35%.

But the central bank softened its language on the necessity of any further action.

The U.S. dollar gained after last week’s rally for riskier currencies paused.

Against a basket of currencies, the dollar index rose 0.1% to 105.38, adding to gains of 0.2% on Monday. Still, the greenback remains close to a near two-month low of 104.84 touched on Monday.

The index fell 1.3% last week, its steepest decline since mid-July.

A slightly stronger dollar has pushed the Japanese yen back to the weak side of 150 to the dollar, and it hovered at 150.5 at the start of the European session.

The euro took a breather at $1.0720. A business survey on Monday showed the downturnin euro zone business activity accelerated last month as demand in the dominant services industry weakened further, suggesting there is a growing chance of a recession in the 20-country currency union.

Analysts expect any prospective decline in the greenback to be bumpy and modest, even if the Fed starts cutting rates next year.

In commodity markets, oil slipped 1.4% with Brent crude futures at $84.02 a barrel, erasing most of Monday’s gains as the mixed data from China and winter demand worries offset the impact of Saudi Arabia and Russia extending output cuts. [O/R]