World stocks steadied above near 6-week lows on Monday and bond yields crept higher as investors started the year’s last full trading week still mindful of interest rate hike risks in 2023.
The US Federal Reserve and European Central Bank hiked rates and promised more last week, and speculation is even building that the Bank of Japan, which meets on Monday and Tuesday, is eyeing a shift in its ultra-dovish stance.
Europe’s STOXX 600 sought to recover, up 0.5 per cent after the index suffered its biggest weekly drop since September with improving business sentiment in Germany helping sooth nerves.
But stress about a too hawkish ECB hurting the economy was more visible across bond markets. Long-term borrowing costs rose for a fourth straight session and short-dated yields remained not far off their highest levels in more than a decade.
“Markets would have done without an ultra-hawkish (ECB President Christine) Lagarde going into the year-end. It wreaked havoc even on rate markets,” said Carlo Franchini, head of institutional clients at Banca Ifigest in Milan.
“Except for the BOJ and perhaps the Bank of England, there’s little confidence in the other central banks. It’s unrealistic to keep raising rates at this pace next year,” he added.
ECB Vice-President Luis de Guindos said on Monday the ECB will hike rates further, adding that the institution was committed to bringing inflation down to its 2 per cent mid-term goal.
Meanwhile, European Union energy ministers meet in Brussels in an effort to agree a cap on gas prices that have inflated energy bills and stoked record-high inflation this year.
Over in Asia, Japan’s Nikkei fell 1.05 per cent to a six-week low and the yen rose 0.4 per cent to 136.20 per dollar. MSCI’s broadest index of Asia-Pacific shares outside Japan fell 0.1 per cent.
Japan will consider revising a 2 per cent inflation target agreed between the government and central bank next year, sources said, a move that may heighten the chance of a tweak to the BOJ’s ultra-loose monetary policy.
“Where there’s smoke, eventually there is fire,” said National Australia Bank strategist Rodrigo Catril in Sydney.
“This sort of news we’re getting plays to this view that the government will open the door for the BOJ to have a more flexible approach and that some of this uber-undervaluation of the yen can be reversed.”
The yen has been the worst-performing G10 currency this year, with a 15 per cent loss against the dollar, driven mainly by the gap between rising U.S. rates and anchored Japanese rates.
Five-year Japanese government bond yields hit a nearly eight-year high, at 0.150 per cent.
In China, stocks saw their biggest one-day drop in seven weeks, as concerns over surging COVID-19 cases disrupting the economy outweighed hopes from the government’s policy support.
“Interest rates are not the only evolving threat to global activity levels,” wrote Rabobank strategist Jane Foley.
U.S. rates were steady last week, despite the Fed projecting further hikes ahead, as traders fret that interest rates are already high enough to start hurting economic growth. Ten-year Treasury yields rose 4 basis points (bps) to 3.522 per cent.
Germany’s 10-year government bond yield, the euro zone’s benchmark, rose 3 basis points (bps) to 2.195 per cent, having added almost 30 basis points since Tuesday’s close.
The S&P 500 dropped 2 per cent last week. It is down 20 per cent for the year and has failed in several attempts at sustainably trading above its 200-day moving average. S&P 500 futures rose 0.2 per cent.
The euro rose 0.2 per cent to $1.060, below last week’s six-month high of $1.0737, and the pound was up 0.4 per cent at $1.219, also below last week’s peak. The dollar index fell 0.2 per cent
Hopes for improvements in China demand lifted oil prices on Monday after tumbling by more than $2 a barrel in the previous session, with Brent crude futures up 0.7 per cent at $79.64 a barrel, but it has barely gained for the year.
Gold inched 0.1 per cent higher at $1,764 an ounce, as a softer dollar countered pressure from expectations of higher U.S. rates. Bitcoin remained below $17,000.