Markets keep an eagle eye on hawkish central banks

Milan — World stocks inched higher on Monday but stayed near six-week lows as investors started the year’s last full trading week still mindful of interest rate hike risks to the economy in 2023.

The US Federal Reserve and European Central Bank (ECB) hiked rates and promised more last week, and speculation is even building that the Bank of Japan (BOJ), which meets on Monday and Tuesday, is eyeing a shift in its ultra-dovish stance.

The MSCI’s benchmark for global stocks hovered around parity. By 09:02GMT, the index had risen 0.1% after a heavy week of interest rate increases sent it on Friday to its lowest point since November 10.

Europe’s Stoxx 600 sought to recover, up 0.5% in early trading, while short-dated eurozone yields were not far off their highest levels in more than a decade as investors remained concerned about a hawkish ECB.

“Markets would have done without an ultra-hawkish [ECB president Christine] Lagarde going into year end. It wreaked havoc, even on rate markets,” said Carlo Franchini, head of institutional clients at Banca Ifigest in Milan.

“Except for the BOJ and perhaps the Bank of England, there’s little confidence in the other central banks. It’s unrealistic to keep raising rates at this pace next year,” he added.

ECB vice-president Luis de Guindos said on Monday that the ECB will hike rates further, adding that the institution is committed to bringing inflation down to its 2% midterm goal.

Meanwhile, EU energy ministers are meeting in Brussels in an effort to agree on a cap for gas prices, which have inflated energy bills and stoked record high inflation this year.

Japan’s Nikkei fell 1.05% to a six-week low and the yen rose 0.5% to ¥135.90/dollar. MSCI’s broadest index of Asia-Pacific shares outside Japan fell 0.15%.

Japan will consider revising a 2% inflation target agreed between the government and central bank next year, sources said, a move that may heighten the chance of a tweak to the BOJ’s ultra-loose monetary policy.

“Where there’s smoke, eventually there is fire,” said National Australia Bank strategist Rodrigo Catril in Sydney. “This sort of news we’re getting plays to this view that the government will open the door for the BOJ to have a more flexible approach,” he said, “and that some of this uber-undervaluation of the yen can be reversed.”

The yen has been the worst-performing Group of 10 currency this year, with a 15% loss against the dollar, driven mainly by the gap between rising US rates and anchored Japanese rates. Five-year Japanese government bond yields hit a nearly eight-year high.

In China, stocks saw their biggest one-day drop in seven weeks, as concerns that surging Covid-19 cases would disrupt the economy outweighed hopes from the government’s policy support.

“Interest rates are not the only evolving threat to global activity levels,” wrote Rabobank strategist Jane Foley.

Last week the Fed projected more interest rate hikes ahead, leaving traders fretting that they are already high enough to start hurting economic growth. Ten-year treasury yields stood at 3.5277%.

The S&P 500 dropped 2% last week. It is down 20% for the year and has failed in several attempts at sustainably trading above its 200-day moving average. S&P 500 futures rose 0.4%.

The euro rose 0.6% to $1.064, below last week’s six-month high of $1.0737, and the pound was up 0.7% at $1.23, also below last week’s peak.

Hopes for improvements in demand lifted oil prices on Monday, with Brent crude futures up 0.4% at $79.36 a barrel, but prices have barely gained for the year.

Gold inched 0.3% higher steady at $1,769/oz. Bitcoin remained trading below $17,000.

Reuters