People, carrying shopping bags, walk inside the King of Prussia shopping mall in Pennsylvania. Reuters
Stocks fell on Tuesday ahead of more interest rate increases from central banks to cool decades-high inflation, with Sweden leading a round of anticipated hefty hikes from its US, Swiss and British counterparts later in the week.
Shares in Europe turned lower by mid-session after US stock futures eased, with the Federal Reserve kicking off a two-day meeting.
The dollar was near a two-decade high versus major peers, underpinned by expectations that the Fed will unveil another large rate increase when its meeting ends on Wednesday.
Crude oil prices were steady, but eurozone bond yields hit new multi-year highs as German producer prices rose in August at their strongest rate since records began, stoking worries about even higher inflation.
US stock futures were down about 0.35 per cent.
The STOXX index of 600 European companies gave up initial gains to ease 0.5 per cent, compounding a 16% slide for the year as fallout from war in Ukraine and rising inflation and borrowing costs fuel recession fears.
Sweden’s central bank hiked rates by a greater than expected full percentage point on Tuesday and warned of more to come, a stark reminder for investors that tackling inflation remains a work in progress for many central banks.
Hikes from the Bank of England and Swiss central bank are expected on Thursday, piling more pressure on stock markets.
“Tighter monetary policy around the world will increase the headwinds for risk assets – after all, central bankers are deliberately trying to slow aggregate demand,” ING bank said.
Markets are priced for US rates to climb as high as 4.5 per cent by early 2023, compared with the Fed’s current 2.25 per cent-2.5 per cent policy rate range.
Luca Paolini, chief strategist at Pictet Asset Management, said the US central bank would likely ease the pace of hikes going into next year.
“The market, in a way, is probably expecting a peak in rates,” Paolini said, adding that market focus would then switch to how higher rates were affecting economies and company earnings.
“We haven’t seen it yet fully, I believe, as significant downgrade in earnings which I think will come. The downside for bonds is limited,” Paolini said.
Inverted yield curves or long-term interest rates below short-term rates, were also a red flag historically to buying shares, he added.
On a more positive note for stocks, the books for Volkswagen’s hotly anticipated initial public offering of Porsche AG on Sept. 29 are covered multiple times over.
Emerging market currencies declined on Tuesday as the dollar held strong in anticipation of another large interest rate hike by the Federal Reserve, while stocks bounced following a three-week selloff in the region.
The dollar index hovered near two-decade highs as investors braced for another 75-basis-point bump by the Fed on Wednesday, with some expecting a super-sized full percentage point increase.
South Africa’s rand and China’s yuan hovered near two-year lows, while Philippine’s peso hit a record low of 57.47 against the dollar.
“Capital inflows into emerging markets are unlikely until the Fed starts reducing interest rates but that is a scenario probably for the second half of next year, so EMs are likely to remain out of favour,” said Piotr Matys, senior FX analyst at InTouch Capital Markets.
Trading in the holiday-shortened week is also set to be determined by a series of other global central bank decisions, including from Brazil, Philippines, England and Japan.
Risk sentiment has taken a hit in recent weeks as traders fret over the impact of the war in Ukraine, rising recession warnings and aggressive central bank moves to rein in soaring inflation.
The Philippine central bank will likely opt for a half-point rate hike on Thursday, a Reuters poll showed. EM stocks rose 1 per cent, tracking global shares on the view that the Fed rate hike has been priced in.
Elsewhere, Turkey’s lira slipped 0.2 per cent. President Tayyip Erdogan said inflation is not an “insurmountable economic threat”, adding it will begin to fall at the end of the year after it surged to more than 80% in August.
On Monday, Turkish lenders Isbank and Denizbank said they suspended use of Russian payment system Mir following a US crackdown on institutions accused of helping Moscow skirt sanctions over the Ukraine war.
stocks rose 1 per cent.
“Demand for Turkish stocks, especially banking stocks, have been robust over the past few months… but demand suddenly fell, causing quite a sharp correction, which is a reminder that in Turkey, it’s quite difficult to hedge yourself against high inflation,” added Matys.
China’s shares inched 0.2 per cent higher, in line with Asian peers. Beijing kept the benchmark lending rates unchanged as expected, as authorities appeared to hold off monetary easing following rapid declines in the local currency.
China’s central bank kept its benchmark lending rates unchanged at a monthly fixing on Tuesday, as expected.
The other exception is the Bank of Japan, also due to meet this week and which has shown no sign of abandoning its ultra-easy yield curve policy despite a drastic slide in the yen and inflation hitting its fastest pace in eight years.