LDN - Business

Stocks wilt, dollar marches higher as central banks spring surprises

[September 21, 2023] By Marc Jones

LONDON (Reuters) - World stocks fell for a fifth straight session, the dollar hit its strongest since March and the Swiss franc tumbled on Thursday, as the latest crop of central bank interest rate moves continued to produce surprises.

European equities stumbled [.EU] after the U.S. Federal Reserve had signaled that it probably had at least one more hike in the tank after its historically rapid run-up in rates over the last 18 months.

Currency dealers were caught off guard though as the Swiss National Bank unexpectedly kept its rates steady and while Norway had hiked its rates as widely expected, it surprised too by signaling it could go again in December.

And the European day was just getting going.

Sterling, which has been on the slide since July, was down at $1.23 ahead of a potentially close call at the Bank of England after softer-than-expected UK inflation data this week.

Goldman Sachs and other banks ditched their previous calls for one more rate increase and investors put a roughly 50% chance on a pause by the BoE, up from just 20% on Tuesday.

Other analysts said they still thought a final BoE rate hike was the most likely outcome after a recent jump in global oil prices, but they stressed it could go either way.

"We stick with our call for a hike, but now see this as a coin toss," JP Morgan economist Allan Monks said.

In the bond markets, it means the search for the elusive peak in rates goes on.

Mirroring a rise in U.S. Treasury yields, Germany's 10-year government bond yield touched a fresh six-month high of 2.73% and Britain's 10-year gilt yield rose to 4.25% after falling on Wednesday to its lowest since July. [GVD/EUR]

FED UP

Overnight in Asia, MSCI's broadest index of Asia-Pacific shares outside Japan had slumped 1.6% in what was its biggest move since early August. Japan's Nikkei fared only slightly better with a 1.4% loss.

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A trader works at the Frankfurt stock exchange in Frankfurt, Germany, February 22, 2022. REUTERS/Timm Reichert

With a crucial Bank of Japan meeting still to come this week, Japan's 10-year government bond yield rose to its highest in a decade.

Though the move signals an expectation that it could finally move away from its easy money "yield curve control" policy it was also tracking U.S. 10-year Treasury yields which had risen to 4.43%, a 16-year peak, in the wake of the Fed.

Ben Luk, senior multi-asset strategist at State Street Global Markets said the overall tone of the Fed's meeting on Wednesday, while not overly hawkish, included two surprises.

Forecasts for 2024 were slightly higher than generally expected and its comments implied that U.S. growth would hold up even if rates stay higher for quite a while.

The median forecast for the federal funds rate is 5.1% by year-end, versus 4.6% estimated in June.

The dollar index, which measures the currency against a basket of rivals, rose as high as 105.59 on Thursday, its strongest since March 9, pushing the yen close to its weakest since November.

Europe's stock market drop also meant MSCI's benchmark world stocks index was down for a fifth day running, its longest losing streak since March.

Wall Street S&P 500 stock futures were down 0.4% too pointing to no rebound there while oil prices, which have been on a tear since Saudi Arabia and Russia agreed to crimp their production recently, posted their largest fall in a month.

Brent crude fell 1.3% to $92.30 per barrel and U.S. crude dropped 1.1% to $88.63 a barrel. Gold was also slightly lower at $1,927.96 an ounce.

(Additional reporting by Xie Yu in Hong Kong; Editing by Shri Navaratnam)

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