Stocks on Watch for Potential Volatility in Key Week for CenBanks: Markets Wrap

Trading may be muted by a holiday in Japan and the UK observing a day of mourning for Queen Elizabeth II

The weakness in markets reflects expectations for an outsized interest rate hike from the US Federal Reserve on Wednesday.
By Matthew Burgess
September 18, 2022 | 07:40 PM
Reading time: 1 min.

Bloomberg — Asian stocks are set for a cautious start on Monday after global equities notched their worst week since the market hit its low for the year in June.

Equity futures suggest a mixed open in Australia while contracts for Hong Kong fell. Trading may be muted by a holiday in Japan and the UK observing a day of mourning for Queen Elizabeth II, with no trading in cash Treasuries during the Asian and European sessions. US stock futures were mixed.

The S&P 500 index fell almost 5% last week in its worst performance since June 17 while the rate sensitive 2-year Treasury yield ended at 3.87%. The weakness in markets reflects expectations for an outsized interest rate hike from the Federal Reserve on Wednesday and worries that its aggressive tightening to quell inflation will trigger a recession.

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Investors also face potential volatility from policy decisions this week by the Bank of England, the Bank of Japan and a host of central banks in Asia. The British pound sank to its weakest level against the dollar since 1985 on Friday and the yen remains under pressure, though it has backed off from just below the key 145 level versus the dollar. The greenback was little changed versus other major currencies early on Monday.

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The slump in global stocks deepened after hotter-than-expected inflation data spurred traders to ratchet up wagers for rate hikes. Swaps continue to price in a 75 basis-point hike when the Fed meets -- with some wagers leaning toward a full point.

Traders briefly priced the Fed’s key policy rate peaking at 4.5% in March last week as the central bank escalates its effort to contain inflation. That expected peak was up by a full percentage point since the Fed’s last policy meeting in July.

“It is clear that the Fed will project hawkish messaging, once again re-iterating that it will bring down inflation unconditionally,” Vasileios Gkionakis, head of European currency strategy at Citigroup Inc. wrote in a note to clients. While Fed hawkishness is already priced in, much will depend on “pre-positioning in the few days before.”

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A University of Michigan survey Friday showed inflation expectations dipped, with consumers expecting prices will climb at an annual rate of 2.8% over the next five to 10 years, the lowest since July 2021.

Some key events this week:

  • World Bank President David Malpass speaks in New York, Monday.
  • European Central Bank vice president Luis de Guindos speaks in Madrid, Monday
  • China loan prime rates, Tuesday.
  • Sweden interest rate decision, Tuesday.
  • Federal Reserve interest rate decision, Wednesday.
  • Big-bank CEOs including Jamie Dimon of JPMorgan Chase and Co. and Brian Moynihan of Bank of America Corp. testify before the US House Financial Services Committee, Wednesday.
  • Reserve Bank of Australia Deputy Governor Michele Bullock speaks at a Bloomberg event in Sydney, Wednesday.
  • Central bank policy meetings in Japan, UK, Indonesia, South Africa, Turkey and Switzerland, Thursday.
  • US Treasury Secretary Janet Yellen speaks in Washington, Thursday.
  • Eurozone PMIs, Friday.

Some of the main moves in markets:

Stocks

  • The S&P 500 futures contracts rose 0.1% as of 7:40 a.m. in Singapore
  • The Nasdaq 100 futures fell 0.1%
  • S&P/ASX 200 futures were steady
  • Hang Seng futures slipped 0.2%

Currencies

  • The Bloomberg Dollar Spot Index fell 0.1%
  • The euro was little changed at $1.0022
  • The Japanese yen rose 0.2% to 142.69 per dollar

Bonds

  • The yield on 10-year Treasuries were little changed at 3.45% on Friday
  • The yield on 10-year Australian notes fell five basis points to 3.68%

Commodities

  • West Texas Intermediate crude rose 0.7% to $85.67 a barrel
  • Gold futures rose 0.3% to $1,679.58 an ounce

Read more at Bloomberg.com

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