Stocks struggle, dollar dominant ahead of central bank binge
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[September 19, 2022] By
Wayne Cole and Alun John
SYDNEY/LONDON (Reuters) - Shares slipped
and the dollar firmed on Monday as investors prepared for a packed week
of central bank meetings which will see borrowing costs rise globally,
with the chance of a super-sized hike in the United States.
Markets are fully priced for a rise in interest rates of 75 basis points
from the Federal Reserve, with futures showing a 20% chance of a full
percentage point.
They also indicate a real chance that rates could hit 4.5% as the Fed is
forced to tip the economy into recession to subdue inflation.
"Asset performance during this Fed tightening cycle is very different
from the norm for other rate hike episodes," said David Chao, a global
market strategist at Invesco
"Usually, the Fed tightens when the economy is thriving and most assets
do well. However, most assets have suffered this time, perhaps due to
the surge in inflation and abrupt policy change."
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Trading was thinned on Monday with British markets closed for Queen
Elizabeth II's state funeral, but Europe's STOXX index slid 0.5% to its
lowest level in two months, dragged down by tech stocks.
MSCI's broadest index of Asia-Pacific shares outside Japan, fell 0.6%,
continuing to set new two-year lows, also hurt by declining tech stocks,
S&P 500 futures dipped 0.67%, while Nasdaq futures fell 0.83%.
As well as the specific rate hike, investors will be watching Fed
members' "dot plot" forecasts for rates, which are likely to be hawkish,
putting the funds rate at 4-4.25% by the end of this year, and even
higher next year.
That risk saw two-year Treasury yields surge 30 basis points last week
alone to reach the highest since 2007 at 3.92%, so making stocks look
more expensive in comparison and dragging the S&P 500 down almost 5% for
the week.
Treasuries are not yet trading, as both Japan and Britain have public
holidays, but euro zone borrowing costs edged higher, with the
short-dated yields not far off their multi-year highs.
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![](../images/091922PIX/busine23.jpg)
The German share price index DAX graph
is pictured at the stock exchange in Frankfurt, Germany, September
16, 2022. REUTERS/Staff/File Photo
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MARKETS SPLIT
It is not just in the U.S. that interest rate rises are expected.
Most of the banks meeting this week - from Switzerland to South
Africa - are expected to hike, with markets split on whether the
Bank of England will go by 50 or 75 basis points.
China's central bank went its own way, though, and cut a repo rate
by 10 basis points to support its ailing economy, leaving blue chips
up 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 drastic
slide in the yen.
The dollar rose 0.34 to 143.45 yen on Monday, having backed away
from the recent 24-year peak of 144.99 in the face of increasingly
strident intervention warnings from Japanese policymakers.
The euro was 0.36% lower at $0.9978, and sterling slipped 0.3% to
$1.1390 just off Friday's 37-year lows, with traders keeping an eye
on new British finance minister Kwasi Kwarteng's emergency
mini-budget, expected Friday.
The dollar index, which measures the currency against six
counterparts, was 0.4% stronger at 110.03.
"We expect the USD to keep trending higher this week to a new
cyclical high above 110.8pts because of the deteriorating outlook
for the world economy," said CBA analysts in a note.
The ascent of the dollar and yields has been a drag for gold, which
was down 0.55% $1,666 an ounce after hitting lows not seen since
April 2020 last week. [GOL/]
Oil prices slid, pressured by the stronger dollar Brent crude fell
1.3% to $90.18. U.S. crude dropped 1.3%, to $83.97. [O/R]
(Reporting by Wayne Cole in Sydney and Alun John in London; Editing
by Sam Holmes, Christian Schmollinger and Ed Osmond)
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