LONDON (Reuters) – Shares were stuck on their worst run since November yesterday, as caution gripped traders in a week in which the Federal Reserve is likely to raise US interest rates and perhaps signal as many as three more hikes lie in store this year.
A near 1 percent drop for Europe’s main bourses amid a flurry of gloomy company news and weaker Wall Street futures meant MSCI’s main 47-country world stocks index was down for a fifth day running.
Japan’s Nikkei ended down almost 1 percent in Asia too as its exporters were hit again by broad-based strength in the yen which was up for a third session in the last four in a lively currency market.
The dollar made ground on the euro, though, as bond traders saw the gap between 10-year German and U.S. government yields, referred to as the ‘transatlantic spread’, ratchet out to its widest since December 2016.
Many analysts had been expecting that spread to narrow as the ECB neared the end of its stimulus this year but it hasn’t proved the case. The shorter-dated 2-year borrowing cost gap has been at its widest level in over 20 years in recent days.
“There has been the narrative of supposed policy convergence between the ECB and the Fed, but that is just not the reality,” said Saxo Bank’s head of FX strategy John Hardy.
With as many as four hikes seen this year, expectations were “chomping at the max” he added. “I think the euro ‘longs’ have good reason to be nervous,” he said referring to those betting on a higher euro.
Equities markets in the rest of Asia had also struggled overnight, though China did manage to eke out some gains as Beijing announced a new economic team.
It included a surprise new central bank chief but for the most part was largely anticipated and is expected to keep the focus on halting riskier types of lending in the giant powerhouse economy.
While Wall Street had bounced on Friday, the major indices still ended lower for the week. The Dow lost 1.57 percent, the S&P 1.04 percent and the Nasdaq 1.27 percent.
The decline was somewhat surprising given figures from Bank of America Merrill Lynch showed a record $43.3 billion of inflows into equities last week, outpacing bond flows for the first time since 2013.
For the year so far, $9.8 billion has gone into tech stocks and $7.3 billion into financials, while $41 billion has flowed into emerging markets and $31 billion into Japan.
Whether the cash continues to flow could depend on what the Fed decides on Wednesday. All 104 analysts polled by Reuters expected the Fed would raise rates to between 1.5 percent and 1.75 percent on Wednesday.
They were less certain on whether the “dot plot” forecasts of committee members will stay at three hikes this year or shift higher.
It will also be the first press conference for new Fed Chair Jerome Powell.
“Expected is a confident Fed Chair, both with respect to the economy’s strength and the Fed’s approach to policy,” said analysts at Westpac in a note.
“While growth forecasts and the distribution of rate projections are likely to drift up, the median Fed funds forecast should remain unchanged at three in 2018 and three more in 2019,” they added. “Gradual and timely are the operative words for policy.”
Analysts at JPMorgan, however, see a risk the Fed might not only add one more rate rise for this year but for 2019 as well.
