Stocks wilt, dollar marches higher as central banks spring surprises

On Thursday, global markets sank for the fifth consecutive day, the dollar rose to its highest level since March, and the Swiss franc plummeted, as the latest round of central bank interest rate hikes continued to surprise.

European shares fell as the US Federal Reserve suggested that it likely had at least one more rate hike in the works following its record swift rate rise over the last 18 months.

Currency traders were taken off guard when the Swiss National Bank surprisingly held its rates stable, and while Norway had upped its rates as generally expected, it also startled by hinting that it would do so again in December.

And the European day had only just begun.

Sterling, which has been falling since July, was down at $1.23 ahead of a possibly close decision at the Bank of England following this week’s weaker-than-expected UK inflation figures.

Goldman Sachs and other banks dropped their prior expectations for another rate hike, and investors now expect the Bank of England to halt, up from 20 per cent on Tuesday.

After a recent rise in global oil prices, some economists said a final BoE rate hike was still the most likely conclusion, although it might go either way.

“We stick with our call for a hike, but now see this as a coin toss,” JP Morgan economist Allan Monks said.

In the bond markets, it means the search for the elusive peak in rates goes on.

Mirroring a rise in US Treasury yields, Germany’s 10-year government bond yield touched a fresh six-month high of 2.73 per cent and Britain’s 10-year gilt yield rose to 4.25 per cent after falling on Wednesday to its lowest since July.

Fed up

Overnight in Asia, MSCI’s broadest index of Asia-Pacific shares outside Japan had slumped 1.6 per cent in what was its biggest move since early August. Japan’s Nikkei fared only slightly better with a 1.4 per cent loss.

With a crucial Bank of Japan meeting still to come this week, Japan’s 10-year government bond yield rose to its highest in a decade.

Though the move signals an expectation that it could finally move away from its easy money “yield curve control” policy it was also tracking US 10-year Treasury yields which had risen to 4.43 per cent, a 16-year peak, in the wake of the Fed.

Ben Luk, senior multi-asset strategist at State Street Global Markets said the overall tone of the Fed’s meeting on Wednesday, while not overly hawkish, included two surprises.

Forecasts for 2024 were slightly higher than generally expected and its comments implied that US growth would hold up even if rates stay higher for quite a while.

The median forecast for the federal funds rate is 5.1 per cent by year-end, versus 4.6 per cent estimated in June.

The dollar index, which measures the currency against a basket of rivals, rose as high as 105.59 on Thursday, its strongest since March 9, pushing the yen close to its weakest since November.

Europe’s stock market drop also meant MSCI’s benchmark world stocks index was down for a fifth day running, its longest losing streak since March.

Wall Street S&P 500 stock futures were down 0.4 per cent too pointing to no rebound there while oil prices, which have been on a tear since Saudi Arabia and Russia agreed to crimp their production recently, posted their largest fall in a month.

Brent crude fell 1.3 per cent to $92.30 per barrel and US crude dropped 1.1 per cent to $88.63 a barrel. Gold was also slightly lower at $1,927.96 an ounce.