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, which tracks shares in 50 countries, rose 0.2% by 0934 GMT on Monday, just below a record high hit in September as stronger-than-expected earnings offset worries over inflation and supply bottlenecks.
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 .MIAPJ0000PUS dragged 0.3% lower by selling in Hong Kong after data showed a sharper-than-expected contraction of Chinese factory activity.
S&P 500 futures rose 0.5%.
“While bears keep pointing to a myriad of concerns, we believe that the risk-reward for stocks is still positive,” said JP Morgan strategist Mislav Matejka. “The Fed is starting to taper, but we believe that key central banks will stay dovish”.
Bond markets calmed down following last week’s brutal sell-off when investors moved to price in faster policy normalisation just ahead of a number of central bank meetings this week including in the United States, Britain and Australia.
“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.”
Treasury Yields and Dollar
The yield on two-year Treasuries, which had soared to an almost 20-month high of 0.5640% last week, was last up about 1.4 basis points at 0.5149%. Benchmark 10-year Treasury yields were up 2.2 bps at 1.5838%.
The U.S. dollar was little changed against a basket of currencies, remaining near a 2-1/2-week high ahead of the Fed policy decision. The greenback approached a 1-1/2-week high against the yen JPY=EBS as the safe-haven Japanese currency weakened after a strong showing for the ruling party in weekend elections.
Commodities also stabilised, with a slight easing of oil prices and a further drop in Chinese coal prices pushing them 50% below last month’s record high.
The Fed is the highlight of a week full of central bank meetings 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.”
By Danilo Masoni and Tom Westbrook