SYDNEY (Reuters) — Stocks slid in Asia on Monday and the dollar strengthened as investors braced for a busy week of central bank meetings that are sure to see borrowing costs rise across the world, with risk size increase in the United States.
Markets are already fully priced for a 75 basis point interest rate hike from the Federal Reserve, with futures showing a 20% chance of a full percentage point.
They also show that real chance rates could hit 4.5% as the Fed is forced to tip the economy into recession to get inflation under control.
“To what level will the rate of funds ultimately have to rise? said Jan Hatzius, chief economist at Goldman Sachs.
“Our response is high enough to generate a tightening of financial conditions that puts a drag on activity sufficient to maintain a growth path well below potential.”
He expects the Fed to hike 75 basis points on Wednesday, followed by two half-point moves in November and December.
Fed members’ dot plot forecasts will also be important for rates, which are expected to be hawkish, putting the funds rate at 4%-4.25% by the end of this year, and even higher l ‘next year.
That risk saw two-year Treasury yields jump 30 basis points last week to the highest since 2007 at 3.92%, making stocks more expensive by comparison and dragging the S&P 500 down by nearly 5% for the week.
On Monday, the holidays in Japan and the UK got off to a slow start and S&P 500 futures fell 0.2%, while Nasdaq futures fell 0.5%.
EUROSTOXX 50 futures added 0.2%, while FTSE futures closed.
MSCI’s broadest index of Asia-Pacific stocks outside Japan fell 0.5%, after losing nearly 3% last week.
The Japanese Nikkei was closed, but futures implied an index of 27,360 from Friday’s close of 27,567.
China’s central bank went its own way and cut its repo rate by 10 basis points to support its struggling economy, leaving blue chips up 0.1%.
A rush to tighten
Bank of America’s latest fund manager survey suggests global equity allocations are at an all-time low.
“But with U.S. yields and the jobless rate heading towards 4-5%, bad sentiment isn’t enough to keep the S&P from hitting new lows for the year,” BofA analysts warned. in a note.
“Our suite of 38 proprietary growth indicators paints a bleak outlook for global growth, but we are witnessing one of the most aggressive tightening episodes in history, with 85% of global central banks in tightening mode.”
Most of the banks gathered this week – from Switzerland to South Africa – are expected to rise, with markets split on whether the Bank of England will go 50 or 75 basis points.
“The latest UK retail sales data confirms our view that the economy is already in recession,” said Jonathan Petersen, senior market economist at Capital Economics.
“So although the pound hit a new multi-decade low against the dollar this week, the relative strength of the US economy suggests to us that the pound will remain under pressure.”
The pound was stuck at $1.1396 after hitting a 37-year low of $1.1351 last week.
One exception is the Bank of Japan, which has so far shown no sign of abandoning its ultra-loose yield curve policy despite the drastic fall in the yen.
The dollar edged higher to 143.25 yen on Monday, after pulling back from the recent 24-year high of 144.99 amid increasingly strident warnings of intervention from Japanese policymakers.
The euro was holding at $0.9991, after pulling back slightly from its recent low of $0.9865 on increasingly hawkish comments from the European Central Bank.
Against a basket of currencies, the dollar rose 0.3% to 109.88, not far from a two-decade high of 110.79 hit earlier this month.
The rise in the dollar and yields was a drag on gold, which was hovering at $1,668 an ounce after hitting lows not seen since April 2020 last week.
Oil prices were trying to rebound on Monday, after losing about 20% so far this quarter amid concerns about demand as global growth slows.
Brent crude firmed 50 cents to $91.85 a barrel, while U.S. crude rose 33 cents to $85.44 a barrel.