Shares sluggish, dollar dips as markets eye Fed rate cuts -November 20, 2023 at 04:51 am EST

* Nikkei hits a high, European stocks flat

* Dollar slips as investors bet rates have peaked

* Fed minutes, European PMIs, Nvidia results feature this
week

SYDNEY/LONDON, Nov 20 (Reuters) – Shares were generally
flat on Monday in thin trading ahead of the U.S. Thanksgiving
holiday on Thursday and in the absence of major data releases
that could give markets direction, while the dollar slipped
against major currencies.

Europe’s benchmark STOXX index was down just 0.04%, with
U.S. futures looking set to follow suit.

The dollar index bottomed out at 103.53, its weakest
level since the start of September, as investors appeared to
solidify bets that U.S. interest rates have peaked and that the
Federal Reserve could start cutting rates next year.

Asian stock markets earlier in the day were livelier as
Japanese shares hit highs not seen since 1990, thanks to strong
earnings and offshore demand which fuelled a three-week winning
streak.

Japan’s Nikkei ran into profit taking at the peak
but was still up 8.2% for the month so far with the Topix
not far behind.

MSCI’s broadest index of Asia-Pacific shares outside Japan
gained 0.8%, having climbed 2.8% last week to a
two-month high.

Meanwhile there were media reports that Israel, the United
States and Hamas had reached a tentative agreement to free
dozens of hostages in Gaza in exchange for a five-day pause in
fighting, but no confirmation as yet.

Black Friday sales will test the pulse of the
consumer-driven U.S. economy this week, while the upcoming
Thanksgiving holiday made for thin markets.

The flow of U.S. economic data turns to a trickle this week,
but minutes of the Federal Reserve’s last meeting will offer
some colour on policy makers’ thinking as they held rates steady
for a second time.

Signs of progress in the battle against inflation, in the
United States have driven a recovery in stocks this year as
investors hope for an end to the cycle of rate hikes that have
been policymakers’ main tool for fighting price increases on
goods.

The S&P is now up nearly 18% for the year and less than
2% away from its July peak.

Yet analysts at Goldman Sachs note the “Magnificent 7” mega
cap stocks have returned 73% for the year so far, compared with
just 6% for the remaining 493 firms.

“We expect the mega-cap tech stocks will continue to
outperform given their superior expected sales growth, margins,
re-investment ratios, and balance sheet strength,” they wrote in
a note. “But the risk/reward profile is not especially
compelling given elevated expectations.”

Tech major Nvidia reports quarterly results on
Tuesday, and all eyes will be on the state of demand for its AI
related products.

A LOT PRICED IN

Markets have all but priced out the risk of a further U.S.
rate hike in December or next year, and imply a 30% chance of an
easing starting in March. Futures also imply around 100 basis
points of cuts for 2024, up from 77 basis points before the
benign October inflation report shook markets.

That outlook helped bonds rally, with 10-year Treasury
yields at 4.45% having dropped 19 basis points last
week and away from October’s 5.02% high.

There was relief in Europe as well for some battered
sovereign names, as the risk premia investors ask to hold
Italian and Portuguese debt fell after ratings agency Moody’s
upgraded its view of the two countries.

It upgraded the outlook for Italy from negative to
stable, and pushed Portugal’s long-term issuer rating up two
notches to A3 from Baa2, narrowing the spreads on both bonds
relative to the region’s benchmark German 10-year bonds.

Closely watched surveys of European manufacturing are due
this week and any hint of weakness will encourage more wagers n
early rate cuts from the European Central Bank.

“These surveys will be very important around the Euro area
services sector given the sharp deterioration seen recently,”
said analysts at NAB. “If another soft print eventuates, expect
pricing for ECB cuts to extend beyond the current 100bps of cuts
being priced for 2024.”

Markets imply around a 70% chance of an easing as soon as
April, even though many ECB officials are still talking of the
need to keep policy tight for longer.

Sweden’s central bank meets this week and may hike again,
given high inflation and the weakness of its currency.

In commodity markets, oil rebounded from four-month lows on
Friday amid speculation OPEC+ will extend, or increase, its
production cuts at a meeting on Nov. 26.

Brent added 60 cents to $81.08 a barrel, while U.S.
crude firmed 31 cents to $76.2 per barrel.

Gold was slightly down at $1,978 an ounce, having
climbed 2.2% last week.

(Reporting by Wayne Cole and Lawrence White; Editing by Lincoln
Feast and Susan Fenton)