Saturday, October 1, 2022

Stocks muted, Sweden kicks off salvo of central bank hikes

Stocks muted, Sweden kicks off salvo of central bank hikes

LONDON (Reuters) - Stocks were little changed on Tuesday as investors braced for more hefty interest rate hikes from central banks to quell inflation, with Sweden setting the tone ahead of its US, Swiss and British counterparts later in the week.

The dollar was steady near a two-decade high versus major peers, crude oil prices were little changed, and euro zone bond yields hit new multi-year highs on concerns over high energy prices.

Asian and European bourses used a tailwind from Monday's advance on Wall Street to chalk up modest gains, with the STOXX index (.STOXX) of 600 European companies flat.

The benchmark is down about 16% for the year as fallout from war in Ukraine and rising borrowing costs fuel recession fears.

The MSCI all country stock index (.MIWD00000PUS) was 0.2% ahead, leaving it down about 20% from a lifetime high in January. US stock futures, the S&P 500 e-minis , advanced 0.22%.

Sweden's central bank hiked rates by a greater than expected full percentage point on Tuesday and warned of more to come. The Fed is also expected to raise rates when a two-day meeting ends on Wednesday, with the Bank of England anticipated to hike on Thursday. 

"Tighter monetary policy around the world will increase the headwinds for risk assets - after all, central bankers are deliberately trying to slow aggregate demand," ING bank said.

Markets are priced for rates to climb as high as 4.5% by early 2023, compared with the Fed's current 2.25%-2.5% policy rate range. 

Luca Paolini, chief strategist at Pictet Asset Management, said the US central bank would likely ease the pace of hikes going into next year.

"The market, in a way, is probably expecting a peak in rates," Paolini said, adding that market focus would then switch to how higher rates were affecting economies and company earnings.

"We haven't seen it yet fully, I believe, as significant downgrade in earnings which I think will come. The downside for bonds is limited," Paolini said.

Inverted yield curves or long-term interest rates below short-term rates, were also a red flag historically to buying shares, he added.


China's central bank kept its benchmark lending rates unchanged at a monthly fixing on Tuesday, as expected. 

The other exception is the Bank of Japan, also due to meet this week and which has shown no sign of abandoning its ultra-easy yield curve policy despite a drastic slide in the yen and inflation hitting its fastest pace in eight years. 

"Just because nobody expects anything coming from Japan, the central bank there could be the more interesting one this week because any hint they are going to change anything could have massive implications for the yen," Paolini said.

Share trading resumed in Japan on Tuesday after a national holiday. The Nikkei (.N225) advanced 0.4% with technology stocks largely driving the climb.

China's blue-chip CSI300 index (.CSI300) was 0.12% higher while Hong Kong's Hang Seng index rose 1.2%.

Sentiment in Hong Kong was also boosted after the government flagged that change to its COVID-19 hotel quarantine policy for all arrivals was coming soon, saying it wanted an "orderly opening-up". 

On Monday, the S&P 500 gained 0.69%, the Nasdaq added 0.76% while the Dow Jones Industrial Average (.DJI) rose 0.64%.

Higher interest rates have caused a sell-off in government bonds. The yield on benchmark 10-year Treasury notes was at 3.5082% after hitting 3.518% on Monday, its highest level since April 2011.

The two-year US yield , a barometer of future inflation expectations, touched 3.9664% after climbing to a fresh almost 15-year high of 3.970%.

Higher US Treasury yields have helped strengthen the dollar and made gold less attractive.

The dollar index , which measures the currency against six counterparts, was 0.128% stronger at 109.680.

Spot gold was traded at $1,670 per ounce, down 0.3%

US crude ticked up 0.3% to $86.01 a barrel. Brent crude rose 0.4% to $92.48 per barrel.