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LONDON (Reuters) – World stocks slipped to a near 2-year low and Japan’s yen was pinned near 1998 levels on Thursday, as investors braced for key U.S. inflation data later likely to shape the size of the Federal Reserve’s next interest rate hike.
Global markets have suffered a torrid few weeks and there was little sign of respite in either Asia or Europe (EU) as weak equities knocked MSCI’s 47-country world index down for a seventh straight day.
The seemingly-unstoppable dollar held its ground in the currency markets to cement the yen’s struggles, while bond traders were also watching Britain’s gilt market with the Bank of England due to end its emergency stabilisation measures on Friday.
Europe’s region-wide STOXX 600 index was down 0.6%, also down for a seventh straight session. It has fallen nearly 4.3% in the last six days, with markets worried that aggressive global interest rate hikes will trigger recessions.
Data had already confirmed German harmonised inflation was +10.9% y/y in September but all eyes are on U.S. CPI data due at 1230 GMT.
Paul O’Connor, Head of Multi-Asset at Janus Henderson Investors, said the question investors have is whether central banks like the Fed are getting close to the end of their interest rate hikes.
“Are we there yet? My feeling is that we are quite close to pricing in peak rates, but on the growth story I think there are probably a lot of downgrades still to come,” he said.
Interest rate hikes take a year to 18 months to fully take effect. As a result “it is quite plausible that around the end of the year, the central banks declare a pause… labour markets will be cooling and housing markets will be falling.”
Minutes of the Fed’s latest policy meeting released on Wednesday had showed many officials “emphasized the cost of taking too little action to bring down inflation likely outweighed the cost of taking too much action”.
Several policymakers did stress, however, that it would be important to “calibrate” the pace of further rate hikes to reduce the risk of “significant adverse effects” on the economy.
Treasury yields were edging up in Europe. The U.S. 10-year benchmark yield ticked up 2 basis points to 3.923%, although most of the equivalent European yields were down a touch.
In Asia overnight, widespread weakness had seen Japan’s Nikkei slip 0.6% and South Korea’s Kospi tumble 1.8% as news that Taiwanese chipmaking giant TSMC had cut its investment budget by at least 10% pressured the wider region’s tech sector.
Hong Kong’s Hang Seng dropped 1.9%, and mainland Chinese blue chips lost 0.3% to leave MSCI’s index of Asia-Pacific shares languishing close to 2 1/2-year lows.
U.S. emini stock futures offered some hope though, rising 0.1% following another drop on S&P 500 overnight.
“I’m more concerned than I’ve been for some time,” said Tom Nash, a fixed income portfolio manager at UBS Asset Management in Sydney. “The risk of an over-tightening episode and some mishap in financial markets is higher than I can remember.”
HEROIC
Fed Governor Michelle Bowman took a hawkish stance in a speech on Wednesday, saying that if high inflation does not start to wane she will continue to support aggressive rate rises.
Markets lay 90% odds for another 75 basis-point rate hike in November, versus 10% probability of a half-point bump.
The dollar index, which gauges the greenback against six major rivals, barely budged from around 113.25 ahead of the CPI data.
The U.S. currency remained close to a fresh 24-year high to the yen and last changing hands at 146.81 while sterling sagged to $1.1050 albeit it was still up from Tuesday’s a two-week trough of $1.0925.
Benchmark 10-year gilt yields had swung from a fresh 14-year peak at 4.632% to sit at 4.337% in early trading.
The Bank of England insisted that its emergency bond market support will expire on Friday as originally announced, countering media reports of continued aid if necessary.
BoE Governor Andrew Bailey had riled markets on Tuesday by saying British pension funds and other investors hit hard by a slump in bond prices had until that deadline to fix their problems.
“Obviously the markets appear a little bit rattled and I think everyone remains worried about the stability of the UK financial markets – this is extraordinary.”
“I would say it’s heroic to say the risk of some sort of systemic problem has been extinguished because these are big moves and we don’t now how much deleveraging needs to be done,” Janus Henderson’s O’Connor said. “Markets still feel very dysfunctional”
Meanwhile, crude oil markets remained weak following a 2% slide on Wednesday amid worries over demand.
Brent crude futures dropped 7 cents, or 0.1%, to $92.38 a barrel, while U.S. West Texas Intermediate crude was down 21 cents, or 0.2%, at $87.06 a barrel. [O/R]
