Shares and bonds hit as Swiss rate hike adds to policy angst

[June 16, 2022]  By Danilo Masoni

MILAN (Reuters) - World stocks fell on Thursday and bonds resumed their slide after a surprise Swiss interest rate hike fuelled fresh concerns over surging inflation and an aggressive policy tightening outlook from global central banks.

The Swiss National Bank raised its policy rate for the first time in 15 years with a surprise 50 basis point hike that soured the mood and sent the safe-haven franc up sharply.

The move came hours before a Bank of England policy meeting which is also set to raise rates, and just a day after the European Central Bank promised fresh support to temper a bond market rout fuelled by hawkish expectations.

The MSCI's benchmark for global stocks gave up earlier gains and by 1001 GMT was down 0.3%. The initial positive reaction to the widely expected 75 basis point (bps) rate hike by the U.S. Federal Reserve also fizzled out.

The pan-European STOXX 600 fell to its lowest since February 2021, down more than 2%, while Swiss stocks were close to confirming a bear market. S&P 500 and Nasdaq e-mini futures slid 2.2% and 2.6% respectively, pointing to a reversal of the previous session's rally.

"There's a lot of nervousness. After the initial relief to the Fed... markets seem to have woken up that it is still a 75 basis point rate hike," Giuseppe Sersale, strategist and portfolio manager at Anthilia in Milan.

"If even the Swiss central bank surprisingly raises by half a point clearly investors imagine that the tightening of central banks is still very violent. There is very little to be cheerful about," he added.

The Fed approved on Wednesday its biggest interest rate hike since 1994. Fed officials also see further steady rises this year, targeting a federal funds rate of 3.4% by year-end.

Fed projections also showed U.S. economic growth slowing to a below-trend rate of 1.7%, and policymakers expect to cut interest rates in 2024.

Data on Friday showed a sharper-than-expected rise in U.S. inflation in May, alongside a University of Michigan survey showing consumers' five-year inflation expectations jumping sharply to their highest since June 2008.

In a news conference following the Fed's latest two-day policy meeting, Fed Chair Jerome Powell said that the survey was "quite eye-catching".

The German share price index DAX graph is pictured at the stock exchange in Frankfurt, Germany, June 15, 2022. REUTERS/Staff

"(Inflation expectations) are starting to look like they're too high. That I think is one reason why Powell wanted to do a 75 ... And I think they will also go again in July," said Joseph Capurso, head of international economics at Commonwealth Bank of Australia.

"They've got to get inflation down. They're so far behind the curve it's not funny."

MSCI's broadest index of Asia-Pacific shares outside Japan fell 1.1%, erasing earlier gains.

After retreating from a 20-year peak following the Fed meeting, the dollar regained its footing.

The global dollar index, which tracks the greenback against a basket of six peers, was last up 0.2% at 105.03.

The Swiss franc soared after the surprise rate hike. It was last up 1.7% against the euro at 1.0209 <EURCHF= > and 1.3% higher against the dollar 0.9808.

Sterling slid 0.3% to $1.2139, not far from a two-year low touched this week, ahead of the BoE meeting, which is expected to deliver at least a 25 bps hike, with swaps pricing implying about an 80% chance of a 50 bps hike.

The SNB hike put fresh pressure on European bond prices, as investors ramped up bets for ECB rate hikes this summer. Germany's 10-year yield, the benchmark for the bloc, rose 16 basis points to a fresh high since January 2014.

U.S. 10-year Treasury yields rose 15 bps to 3.442%.
 

Oil prices erased early gains, though tight supply limited losses. Brent crude was last down 0.9% to $117.5 per barrel and U.S. crude fell 0.7% to $114.5. [O/R]

Gold was slightly lower as the dollar firmed. Spot gold last traded at $1,830.7 per ounce, down 0.1% on the day. [GOL/]

(Reporting by Danilo Masoni and Andrew Galbraith; Editing by Kim Coghill)

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