Shares dampened, Sweden kicks off salvo of central bank hikes
LONDON—Stocks were little changed on Tuesday as investors braced for more hefty rate hikes from central banks to tame inflation, with Sweden setting the tone ahead of its U.S., Swiss and British counterparts later in the week.
The dollar was steady near two-decade highs against major peers, crude oil prices were little changed and euro zone bond yields hit fresh multi-year highs on concerns over high energy prices.
Asian and European stocks used a tailwind from Monday’s rally on Wall Street to put together modest gains, with the STOXX index of 600 European companies unchanged.
The benchmark is down about 16 percent for the year as fallout from the war in Ukraine and rising borrowing costs stoke recession fears.
The MSCI all-country stock index was 0.2 percent ahead, leaving it down about 20 percent from a lifetime high in January. US stock futures, the S&P 500 e-minis, rose 0.22 percent.
Sweden’s central bank raised interest rates by more than expected full percentage points on Tuesday and warned of more to come. The Fed is also expected to raise interest rates when a two-day meeting ends on Wednesday, with the Bank of England expected to raise on Thursday.
“Tighter monetary policy around the world will increase headwinds for risk assets – after all, central banks are deliberately trying to slow aggregate demand,” ING Bank said.
Markets are pricing in rates to climb as high as 4.5 percent in early 2023, compared to the Fed’s current policy rate range of 2.25 percent-2.5 percent.
Luca Paolini, chief strategist at Pictet Asset Management, said the US central bank was likely to ease the pace of hikes going into next year.
“The market, in a sense, is probably expecting a peak in interest rates,” Paolini said, adding that market focus would then shift to how higher interest rates affected economies and corporate earnings.
“We haven’t yet fully seen that, I think, as a significant downgrade to earnings that I think will come. The downside for bonds is limited,” Paolini said.
Inverted yield curves, or long-term rates below short-term rates, were also historically a red flag for buying stocks, he added.
Opposite China
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, which will also meet this week and has shown no sign of abandoning its ultra-easy yield curve despite a sharp decline in the yen and inflation hitting its fastest pace in eight years.
“Just because nobody expects anything to come out of Japan, the central bank there could be the more interesting one this week because any hint that they’re going to change anything could have huge implications for the yen,” Paolini said.
Stock trading resumed in Japan on Tuesday after a national holiday. The Nikkei rose 0.4 percent with technology stocks largely driving the rise.
China’s blue-chip CSI300 index was 0.12 percent higher, while Hong Kong’s Hang Seng index rose 1.2 percent.
On Monday, the S&P 500 rose 0.69 percent, the Nasdaq added 0.76 percent, while the Dow Jones Industrial Average rose 0.64 percent.
Higher interest rates have caused a sell-off in government bonds. The yield on the benchmark 10-year Treasury note was at 3.5082 percent after hitting 3.518 percent on Monday, the highest level since April 2011.
The two-year U.S. yield, a barometer of future inflation expectations, hit 3.9664 percent after climbing to a fresh nearly 15-year high of 3.970 percent.
Higher US government interest rates have helped strengthen the dollar and made gold less attractive.
The dollar index, which measures the currency against six peers, was 0.128 percent stronger at 109.680.
Spot gold traded at $1,670 an ounce, down 0.3 percent.
US crude ticked up 0.3 percent to $86.01 a barrel. Brent crude rose 0.4 percent to $92.48 a barrel.
By Huw Jones