Stocks Muted, Sweden Kicks Off Salvo of Central Bank Hikes

By Reuters
September 20, 2022 Updated: September 20, 2022

LONDON—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 U.S., 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 eurozone 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 of 600 European companies flat.

The benchmark is down about 16 percent for the year as fallout from war in Ukraine and rising borrowing costs fuel 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. U.S. stock futures, the S&P 500 e-minis, advanced 0.22 percent.

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 percent by early 2023, compared with the Fed’s current 2.25 percent–2.5 percent policy rate range.

Luca Paolini, chief strategist at Pictet Asset Management, said the U.S. 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.

Contrarian 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, 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 advanced 0.4 percent with technology stocks largely driving the climb.

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 gained 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 benchmark 10-year Treasury notes was at 3.5082 percent after hitting 3.518 percent on Monday, its highest level since April 2011.

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

Higher U.S. 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 percent stronger at 109.680.

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

U.S. crude ticked up 0.3 percent to $86.01 a barrel. Brent crude rose 0.4 percent to $92.48 per barrel.

By Huw Jones