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Stocks struggle, dollar dominates ahead of central bank dilemma

Stocks struggle, dollar dominates ahead of central bank dilemma
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  • https://tmsnrt.rs/2zpUAr4
  • S&P 500 futures slip, Nikkei futures down
  • Fed leads pack at central bank meeting
  • Markets lean towards 75 bp from Fed, PBOC easing
  • Dollar firmed near multi-year highs

SYDNEY/LONDON, Sept 19 (Reuters) – Shares fell on Monday as investors braced for a weeklong central bank meeting and the dollar signed signs that global borrowing costs will rise, including the possibility of a super-sized increase in the U.S. .

Markets have fully priced in a 75 basis point interest rate hike from the Federal Reserve, with futures showing a 20% chance of a full percentage point increase.

They also point to a real possibility that rates could hit 4.5% as the Fed is forced to steer the economy into recession to tame inflation. Read more

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“Asset performance during this Fed tightening cycle is very different from the norm during other rate hike episodes,” said David Chao, global market strategist at Invesco.

“Typically, the Fed tightens when the economy is improving and most assets are doing well. However, most assets have suffered during this period, likely due to higher inflation and sudden policy changes.”

Trading was thin as British markets were closed on Monday for the state funeral of Queen Elizabeth II, but Europe’s STOXX index (.STOXX) 0.5% slide to lowest level in two months, dragged down by tech stocks. (.SX8P) Read more

MSCI’s broadest index of Asia-Pacific shares outside Japan (.MIAPJ0000PUS)Down 0.6%, set to set fresh two-year lows, also hurt by declines in technology stocks, (.HSTECH)

S&P 500 futures fell 0.67%, while Nasdaq futures fell 0.83%.

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

That risk saw the two-year Treasury yield rise 30 basis points last week to the highest since 2007 at 3.92%, making stocks look relatively more expensive and dragging the S&P 500 down nearly 5% for the week.

Treasuries are still not trading, as Japan and Britain both have public holidays, but borrowing costs in the euro zone have risen, with short-dated yields not far from their multi-year highs.

The market is fragmented

It’s not just in the US that interest rate hikes are expected. With most bank meetings this week – from Switzerland to South Africa – expected to increase, markets are divided over whether the Bank of England will go for 50 or 75 basis points. Read more

While China’s central bank went its own way and cut the repo rate by 10 basis points to support its ailing economy, the blue chips remained (.CSI300) rose 0.1%.

The other exception is the Bank of Japan, which has shown no sign of abandoning its uber-easy yield curve policy despite the yen’s sharp slide. Read more

The dollar rose 0.34 to 143.45 yen on Monday, retreating from a recent 24-year peak of 144.99 amid warnings of increasingly tighter intervention by Japanese policymakers.

The euro was 0.36% lower at $0.9978, and sterling fell 0.3% to $1.1390 ​​from Friday’s 37-year low, as traders eyed new British finance minister Quasi Kwarteng’s emergency mini-budget, expected on Friday.

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

“We expect the USD to maintain a fresh cyclical high above 110.8pts this week due to the deteriorating outlook for the global economy,” CBA analysts said in a note.

The dollar’s surge and yields were a drag on gold, which fell 0.55% to $1,666 an ounce last week after hitting a low not seen since April 2020.

Oil prices fell, with Brent crude down 1.3% to $90.18 on pressure from a stronger dollar. US crude fell 1.3% to $83.97.

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Reporting by Wayne Cole in Sydney and Alun John in London; Editing by Sam Holmes, Christian Smallinger and Ed Osmond

Our values: Thomson Reuters Trust Policy.

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