Stocks muted, Sweden kicks off salvo of central bank hikes

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LONDON – Stocks were little changed on Tuesday as investors braced for sharper interest rate hikes by central banks to quell inflation, with Sweden setting the tone ahead of its US, Swiss and British at the end of the week.

The dollar held near a two-decade high against major peers, crude oil prices were little changed and euro zone bond yields hit fresh multi-year highs on worries about high oil prices energy

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Asian and European stocks used a headwind from Monday’s advance on Wall Street to post modest gains, with the STOXX index of 600 European companies flat.

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The benchmark is down 16% for the year as the fallout from the war in Ukraine and rising borrowing costs fuel recession fears.

The MSCI stock index for all countries advanced 0.2 percent, leaving it about 20 percent below January’s lifetime high. US stock futures, the S&P 500 e-minis, advanced 0.22%.

Sweden’s central bank raised rates on Tuesday by a higher-than-expected percentage point and warned of more to come. The Fed is also expected to raise rates when it ends a two-day meeting on Wednesday, and the Bank of England is expected to hike on Thursday.

“Tighter monetary policy around the world will increase headwinds for risk assets – after all, central banks are deliberately trying to curb aggregate demand,” bank ING said.

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Markets are pricing in rates to rise to 4.5% by early 2023, compared to the Fed’s current policy rate range of 2.25% to 2.5%.

Luca Paolini, chief strategist at Pictet Asset Management, said the US central bank is likely to ease the pace of rate hikes next year.

“The market, in some ways, is probably expecting a spike in rates,” Paolini said, adding that the market’s focus would shift to how higher rates affected economies and corporate earnings.

“We haven’t seen it quite yet, I think, as a significant reduction in earnings that I think will come. The downside to bonds is limited,” Paolini said.

Inverted yield curves or long-term interest rates below short-term rates were also historically a red flag to buy stocks, he added.

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CHINA OPPOSITE

China’s central bank kept its benchmark lending rates unchanged at a monthly peg on Tuesday, as expected.

The other exception is the Bank of Japan, which is also due to meet this week and has shown no sign of abandoning its ultra-easy yield curve policy despite a sharp fall in the yen and inflation that reached its fastest pace in eight years.

“Just because nobody expects anything to come out of Japan, the central bank could be the most interesting this week because any indication that anything is going to change could have massive implications for the yen,” Paolini said.

Stock trading resumed in Japan on Tuesday after a national holiday. The Nikkei advanced 0.4% with technology shares largely driving the rise.

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China’s blue-chip CSI300 rose 0.12 percent while Hong Kong’s Hang Seng rose 1.2 percent.

Sentiment in Hong Kong also rose after the government signaled that a change to its hotel COVID-19 quarantine policy for all arrivals was coming soon, saying it wanted an “orderly opening”.

On Monday, the S&P 500 gained 0.69%, the Nasdaq gained 0.76% while the Dow Jones Industrial Average rose 0.64%.

Higher interest rates have led to a sell-off in government bonds. The benchmark 10-year Treasury yield was at 3.5082% after reaching 3.518% on Monday, its highest level since April 2011.

The two-year US yield, a barometer of future inflation expectations, touched 3.9664% after rising to a new nearly 15-year high of 3.970%.

Higher US Treasury yields have helped strengthen the dollar and made gold less attractive.

The dollar index, which measures the currency against six peers, was 0.128% stronger at 109.680.

Spot gold traded at $1,670 an ounce, down 0.3%

US crude rose 0.3% to $86.01 a barrel. Brent crude rose 0.4% to $92.48 a barrel.

(Reporting by Huw Jones, additional reporting by Julie Zhu; Editing by Edwina Gibbs and Alison Williams)