Global markets brace for a swathe of rate hikes

Sydney/London — Shares slipped and the dollar firmed on Monday as investors prepared for a packed week of central bank meetings which will see borrowing costs rise globally, with the chance of a supersized hike by the US Federal Reserve.

Markets have fully priced a 75 basis-point increase in the Federal Funds Rate, with futures showing a 20% chance of a full percentage point hike. They also indicate the likelihood that rates could hit 4.5% as the Fed is forced to tip the economy into recession to subdue inflation.

“Asset performance during this Fed tightening cycle is very different from the norm for other rate-hike episodes,” said David Chao, a global market strategist at Invesco. “Usually, the Fed tightens when the economy is thriving and most assets do well. However, most assets have suffered this time, perhaps due to the surge in inflation and abrupt policy change.”

Trading was thinned on Monday with British markets closed for Queen Elizabeth II’s state funeral, but Europe’s Stoxx index slid 0.5% to its lowest level in two months, dragged down by tech stocks.

MSCI’s broadest index of Asia-Pacific shares outside Japan fell 0.6%, continuing to set new two-year lows, also hurt by declining tech stocks. In the US, S&P 500 futures dipped 0.67%, while Nasdaq futures fell 0.83%.

In addition to the specific rate hike, investors will be watching Fed members’ “dot plot” forecasts for rates, which are likely to be hawkish, putting the funds rate at 4%-4.25% by the end of this year, and even higher next year.

That risk saw two-year Treasury yields surge 30bps last week alone to reach the highest since 2007 at 3.92%, so making stocks look more expensive in comparison and dragging the S&P 500 down almost 5% for the week.

Treasuries are not yet trading, as Japan and Britain have public holidays, but eurozone borrowing costs edged higher, with the short-dated yields not far off their multiyear highs.

Markets split

It is not just in the US that interest rate increases are expected. Most of the central banks meeting this week — from Switzerland to SA — are expected to hike, with markets split on whether the Bank of England will go by 50bps or 75bps.

China’s central bank went its own way, though, and cut a repo rate by 10bps to support its ailing economy, which took blue chips 0.1% higher.

The other exception is the Bank of Japan, which has shown no sign of abandoning its extra-easy yield curve policy despite the drastic slide in the yen.

The dollar rose 0.34% to 143.45 yen on Monday, having backed away from the recent 24-year peak of 144.99 in the face of increasingly strident intervention warnings from Japanese policymakers.

The euro was 0.36% lower at $0.9978, and sterling slipped 0.3% to $1.1390 just off Friday’s 37-year lows, with traders keeping an eye on new British finance minister Kwasi Kwarteng’s emergency mini-budget, expected on Friday.

The dollar index, which measures the currency against six counterparts, was 0.4% stronger at 110.03.

“We expect the dollar to keep trending higher this week to a new cyclical high above 110.8 points because of the deteriorating outlook for the world economy,” CBA analysts said in a note.

The ascent of the dollar and yields has been a drag for gold, which was down 0.55% at $1,666/oz after hitting lows not seen since April 2020 last week.

Reuters

Source: businesslive.co.za