Stocks kick off big central bank week near peaks

MILAN (Reuters): World stocks kicked off a big week for central bank meetings near record highs, helped by bets of fiscal stimulus in Japan and undeterred by concerns of interest rate hikes that have instead hit bonds hard.

The MSCI world equities index rose 0.2% by 1230 GMT on Monday, marching closer to the record high hit in September and consolidating the gains seen over the past few weeks when optimism over the earnings season offset worries over inflation pressures and a slowing economic recovery.

Japan’s Nikkei rose 2.6% after Prime Minister Fumio Kishida’s Liberal Democratic Party won an unexpected comfortable victory, raising hopes for political stability and stimulus in the term ahead.

Trade elsewhere in equities was soft, with MSCI’s index of Asia-Pacific shares outside Japan dragged 0.2% lower by selling in Hong Kong after data showed a sharper-than-expected contraction of Chinese factory activity.

S&P 500 and Nasdaq futures rose 0.3-0.4%.

“While bears keep pointing to a myriad of concerns, we believe that the risk-reward for stocks is still positive,” JP Morgan strategist Mislav Matejka said, also citing signs of an easing in supply constraints and power price pressures.

“The Fed is starting to taper, but we believe that key central banks will stay dovish... Equities are likely to tolerate tapering and we have argued that the market internal leadership will turn more cyclical,” he added.

Bond markets calmed down after the brutal sell-off last week when investors scared by inflation pressures moved to price in faster policy normalisation just ahead of a number of central bank meetings this week including in the US, UK and Australia.

The yield on two-year Treasuries, which had soared to an almost 20-month high of 0.5640% last week, was last up 1.6 basis points (bps) at 0.5169%, while 10-year Treasury yields were up 1.9 bps at 1.5821%.

In Europe, Germany’s 10-year yield, the benchmark for the euro area, rose 1.2 bps to -0.082% but held below Friday’s peak of -0.064%.

“I think we may come out of (the) week past peak yield volatility, or at least, past peak rate hike fever,” said NatWest Markets strategist John Briggs. “A lot of the things that went parabolic and took market rate hike expectations to a boil are at least looking like they are calming a bit.” The US Dollar consolidated gains ahead of the Fed meeting which is widely expected to announce a tapering of stimulus.

The dollar was 0.1% softer against a basket of six rivals, while it hit a 1-1/2-week high against the yen as the safe-haven Japanese currency weakened after the weekend elections. Commodities also stabilised with a further drop in Chinese coal prices pushing them 50% below last month’s record high. Oil prices reversed earlier declines with Brent crude futures last up 1% at $ 84.56 per barrel, helped by expectations of strong demand. 

The Fed is the highlight of a week full of central bank meetings which are likely to move markets, with policy adjustments possible at the Bank of England and Reserve Bank of Australia.

The Fed, which concludes a two-day meeting on Wednesday, is expected to say it will start to taper bond purchases, though markets’ focus is on clues about rates lift-off.

Fed funds futures are pricing in hikes beginning early in the second half of 2022 and Goldman Sachs pulled forward its hike forecast to July next year from the third quarter of 2023.

“While maintaining the view that most of the inflation we are seeing will prove transitory, a risk management mindset has taken over, and developed market central banks are now changing tack,” analysts at Goldman Sachs said in a late-Friday note.

“The Bank of England looks likely to raise rates (and) the Reserve Bank of Australia appears to have abandoned its yield curve peg,” they added.

Swaps pricing points to a better-than-even chance of the BoE hiking on Thursday, while the RBA will likely make some sort of guidance adjustment after again declining to defend its yield target on Monday.

Sterling fell 0.1% to $ 1.3675.

Gold added 0.2% following Friday’s losses amid caution ahead of the Fed meeting. Bitcoin was up 1.3% at $ 62,112.