Asian stocks prepare to hit central bank rallies

Asian stocks prepare to hit central bank rallies

by Wayne Cole

SYDNEY (Reuters) – Stock markets in Asia paused on Monday as investors braced for a week filled with 13 central bank meetings sure to see borrowing costs rise worldwide and some risks of a big rally in the United States.

Entire markets are already priced against the Fed’s 75 basis point rise, with futures showing an 18% chance of a full percentage point.

It also shows that 50-50 chance rates could rise to 5.0-5.25% as the Fed is forced to push the economy into recession to bring down inflation.

โ€œHow high should the rate of money eventually go up?โ€ Jan Hatzius, chief economist at Goldman Sachs (NYSE:) said.

“Our answer is high enough to generate a tightening in financial conditions that puts a drag on activity enough to maintain a growth path well below potential.”

He expects the Fed to rise by 75 basis points on Wednesday, followed by two moves of half a point in November and December.

Also important is the Fed members’ “dot plot” expectations for potentially hawkish rates, putting the funds rate at 4-4.25% by the end of this year, and even higher next year.

Those risks saw two-year Treasury yields rise by 30 basis points last week alone to reach their highest level since 2007 at 3.92%, making stocks look more expensive compared to a decline of about 5% for the week.

Early Monday, holidays in Japan and the UK got off to a slow start and rose 0.1%, while Nasdaq futures were flat.

MSCI’s broadest index of Asia-Pacific shares outside Japan added 0.1%, after losing nearly 3% last week.

It was closed, but futures included an index of 27,335 compared to Friday’s close of 27,567.

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Hike every round

Bank of America’s latest survey of fund managers suggests that allocations to global equities are at an all-time low.

“But with both US yields and the unemployment rate heading to 4-5%, bad sentiment is not enough to prevent the S&P from hitting new lows for the year,” Bank of America analysts warned in a note.

โ€œOur set of 38 proprietary growth indicators depict a bleak outlook for global growth, yet we are staring at one of the most aggressive tightening periods in history, with 85% of global central banks in a tightening mode.โ€

Most banks’ meeting this week – from Switzerland to South Africa – is expected to pick up with markets divided over whether the BoE will go 50 or 75 basis points.

โ€œThe latest UK retail sales data supports our view that the economy is already in a recession,โ€ said Jonathan Petersen, chief market economist at Capital Economics.

โ€œSo, even though sterling hit a new multi-decade low against the dollar this week, the relative strength of the US economy suggests to us that sterling will remain under pressure.โ€

The British Pound was stuck at $1.1436 after hitting a 37-year low of $1.1351 last week, [GBP/]

The strange man is the Bank of Japan which has so far shown no sign of abandoning its ultra-accommodative yield curve policy despite the sharp slide in the Yen.

The dollar settled at 142.78 yen on Monday, having retreated from the recent 24-year high of 144.99 in the face of increasingly sharp intervention warnings from Japanese policy makers.

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The euro settled at $1.1021, having climbed from a recent low of $0.9865 thanks to increasingly hawkish comments from the European Central Bank.

Against a basket of currencies, the dollar settled at 109.60, far from a two-decade high of 110.79 touched earlier this month.

The dollar’s rally and yields were a drag on gold, which was hovering at $1,678 an ounce after hitting its lowest levels not seen since April 2020 last week. [GOL/]

Oil prices were trying to bounce back on Monday, having fallen about 20% so far this quarter on demand concerns as global growth slows. [O/R]

It rose 60 cents to $91.95, while it rose 55 cents to $85.66 a barrel.

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