Risk rally stalls as bullish investors take a breather, dollar steadies

World stocks fell for the first time in five sessions, oil slipped and the dollar saw a slight lift on Thursday, as markets continued to acclimatize to falling borrowing costs after nearly two years of relentless gains.

Europe’s moves saw the STOXX 600 slip from a more than one-month high, Wall Street look set for an early dip, and Taiwan’s dollar rise after China’s President Xi Jinping and U.S. counterpart Joe Biden agreed to reopen key military communications channels between the two superpowers.

Xi also underscored the point by saying China would not “fight a cold war or a hot war with anyone”.

Global markets have rallied sharply this month as inflation data out of the United States and parts of Europe, such as Britain, have reinforced hopes that major central banks are now done raising borrowing costs.

Robust US retail sales figures on Wednesday were a reminder that it might not be a straight line move, however, with the focus now squarely on weekly US jobless claims data later and a monthly euro zone inflation print on Friday.

“If you don’t get confirmation of the slowing economic direction from every single piece of data every single day we risk running out of momentum on the big trades,” Societe Generale FX strategist, Kit Juckes, said.

“Until we get to the point where rate cuts are just around the corner, everything is going to be very stop-start. The dollar sell-off is stop-start, the bond market rally is really stop-start and the equity market is all over the place.”

Key government bond market borrowing costs resumed their broad downward trend on Thursday, driven by increasing confidence that rate cuts are coming next year.

Germany’s 10-year bond yield dipped to 2.62% but held above the previous day’s two-month low of 2.568%, while sterling sank to a six-month low against the euro as dealers in London inched closer their predictions on when the Bank of England (BoE) will start cutting rates.

Many now think it might be as soon as May although BoE policymaker Meg Greene warned on Thursday that investors are missing the message that central banks have been pushing recently that interest rates will remain higher for longer.

“I think markets globally haven’t really clocked on to this,” Greene told Bloomberg Television, adding that the BoE was not talking about cutting rates.

Asian stocks fell overnight as new Chinese data showed continued weakness in its problem-hit property sector which dented recent optimism about a recovery in the world’s second-largest economy.

While data this week showed China’s industrial and retail sectors are now making a comeback, figures have also shown a sharp drop in property investment and weak home prices, underscoring the ongoing drag the sector is having.

There was mixed news from Japan too, where exports grew for a second straight month in October but at a sharply slower pace due to slumping China-bound shipments of chips and steel.

“The weak economic data from both countries indicate the fact that the global economy is slowing down, highlighting ongoing macro headwinds that businesses face,” said Tina Teng, market analyst at CMC Markets.

Australian shares ended their day down 0.7% as strong wage data indicated that inflationary pressures there are still running high.

Japan’s Nikkei dipped 0.3%, moving into reverse after it, along with the main MSCI Asian and emerging market indexes, all posted their biggest gains in a year on Wednesday.

Chinese stocks showed some disappointment at Xi and Biden’s first meeting in years, with Shanghai’s blue-chip CSI300 index closing down 1% and Hong Kong’s Hang Seng index ending 1.3% lower.

While the two leaders agreed to resume military-to-military communications and cooperate on anti-drug policies, a sign ties are improving, some investors were disappointed at a lack of other breakthroughs in the talks.

The MSCI main 47-country global stocks index was down for the first time in five sessions after a near 8% surge this month.

Wall Street futures pointed to a slightly weaker start there too, although there was modest relief that the Senate had overwhelmingly approved a temporary funding measure to avert another U.S. government shutdown for now.

Money market traders have now fully priced in that the Federal Reserve will keep US interest rates steady in December. They see the first rate cut of the cycle in May.

The yield on benchmark 10-year Treasury notes was back under 4.5% compared with its US close of 4.537% on Wednesday. The two-year yield hovered at 4.88% compared with a U.S. close of 4.916%.

In currencies, the euro was flat at $1.0848, having gained 2.5% in a month, while the dollar index, which tracks the greenback against a basket of currencies of other major trading partners, was fractionally higher.

Oil traders, meanwhile, nudged US crude down 0.3% to $76.55 a barrel. Brent crude was at $80.90 per barrel while safe-haven gold was slightly higher at $1,965 per ounce .

Agencies