Stocks on Firm Ground as Markets Brace for Central Bank Loaded Week

By Reuters
Reuters
Reuters
December 13, 2021 Updated: December 13, 2021

LONDON—World stocks, oil prices, and the dollar firmed on Monday as a generally upbeat mood took hold of world markets ahead of a host of central bank meetings this week that includes the U.S. Federal Reserve.

Equity markets across Europe opened higher, with the pan-region STOXX 600 index last up 0.35 percent, while U.S. equity futures were around 0.25 percent firmer.

China’s blue-chip CSI300 index closed up 0.6 percent.

Omicron remained a concern with British Prime Minster Boris Johnson warning of a “tidal wave” of new cases of the coronavirus variant.

Oil prices rose around 1 percent, while the dollar was broadly firm ahead of Tuesday’s two-day Federal Reserve meeting.

The U.S. central bank is widely expected to signal a faster tapering of asset buying, and thus an earlier start to rate hikes. It will also update the dot plots for rates over the next couple of years.

The market is already well ahead, with a 25 basis point rise fully priced in by June.

Also, meetings are the European Central Bank, the Bank of England, and the Bank of Japan and all are heading toward normalising policy at their own, often glacial, pace.

“We expect that ultimately, the main central banks will begin hiking interest rates, and the market certainly expects that,” said April LaRusse, head of fixed income investment specialists at Insight Investment.

“If the Fed increases the taper from $15 billion to something like $30 billion they could be finished by March, which would allow them to look to hike rates after that,” she added.

The Treasury market has taken the risk of earlier Fed hikes with equanimity, perhaps in the belief that it will mean lower inflation over the long run and a lower peak for the cash rate.

Yields on 10-year notes rose almost 13 basis points last week, but at 1.49 percent remain well below the high for the year of 1.776 percent.

The prospect of a more aggressive Fed has been supportive of the dollar.

On Monday, the dollar index was around 0.2 percent firmer at 96.328. The greenback was also up almost a fifth of percent at 113.60 yen, while the euro slipped a quarter of a percent to $1.12875.

“We think the bar for a hawkish surprise from the Fed is set high, so unless it delivers a major revision to its forward guidance, the dollar rally looks due a pause,” said Jonathan Petersen, a market economist at Capital Economics.

“That said, there is scope for the greenback to appreciate further over the course of next year.”

Britain’s pound weakened about 0.4 percent to $1.32240, with the government’s latest warnings on the spread of Omicron weighing on sentiment.

Turkey’s lira meanwhile crashed as much as 7 percent in just a few minutes to a new record near 15 to the dollar, gripped by worries over President Tayyip Erdogan’s risky new economic policy and prospects of another interest rate cut on Thursday.

In commodity markets, gold was busy going nowhere at $1,786 an ounce after gaining only fleeting support from Friday’s lofty U.S. inflation reading.

By Dhara Ranasinghe

Reuters