Stock Market

Marketmind: Anticipating More Rate Hikes, with a Dash of Cut

In the realm of European and global markets, let’s explore what lies ahead, as penned by Wayne Cole.

As anticipated, Asia finds itself in a subdued state, seizing upon a U.S. holiday as a suitable pretext to consolidate recent substantial gains. A flurry of central bank meetings looms large on the horizon this week. Most indices have veered southward, witnessing the Nikkei’s modest descent after a glorious 10-week ascent, surging by an astonishing 22% to reach a remarkable 33-year pinnacle.

S&P 500 futures exhibit a lingering stillness after five consecutive weeks of ascent, while the NASDAQ revels in the glory of eight weeks of uninterrupted triumph. Alas, these rallies bear the burden of being precariously concentrated, with a mere nine large-cap stocks commanding 30% of the S&P 500. Hence, it becomes increasingly challenging to perceive the index as a prudent vehicle for diversified investment.

All eyes are trained on U.S. Secretary of State Antony Blinken’s visit to Beijing, yet expectations remain dismal when a Chinese diplomat’s willingness to extend a handshake becomes noteworthy news.

Shifting our gaze to the currency realm, the yen continues to succumb to its downward spiral, while the euro and dollar ascend to newfound heights, albeit by a mere fraction. Unless and until the Bank of Japan takes decisive strides toward tightening, a trajectory marked by further losses appears inevitable. Western analysts entertain the notion of such strides materializing in July. Nonetheless, Governor Kazuo Ueda casts doubt, implying that a significant shift in his inflation outlook would be prerequisite to justify such a move.

The week ahead teems with central bank spectacles, commencing with China on Tuesday, where a 10-basis-point reduction in prime loan rates is anticipated. Yet, this might prove futile, considering the significant decline already witnessed in mortgage rates. Regrettably, lower rates merely gnaw away at the returns on household savings. Market enthusiasts are eagerly awaiting additional fiscal stimuli, which have proven effective in reigniting growth time and again.

Federal Reserve Chair Jerome Powell assumes the congressional spotlight on Wednesday and Thursday, once again endeavoring to convince market participants that two more quarter-point rate hikes are genuinely and unequivocally likely. Futures, however, appear unimpressed, barely factoring in a meager 21 basis points of tightening by September. Nevertheless, they assign a respectable 70% probability to a final hike in July.

In stark contrast, market forces fervently demand the Bank of England to seize the moment and execute a hike during their Thursday rendezvous. The only conundrum that remains is whether the increase will amount to 25 or 50 basis points. Futures marginally lean toward the more conservative option, settling at 4.75%. However, they envisage rates ascending to a minimum of 5.75%, a testament to unyielding inflation and surging wages.

Gilt yields have already soared to heights unseen in 15 years, unleashing chaos in the UK mortgage market and further amplifying the government’s already astronomical borrowing costs.

This week also heralds rate hikes in Norway and Switzerland, potentially scaling the 50-basis-point mark. Yet, such endeavors may pale in comparison to Turkey’s central bank, with whispers circulating among analysts that rates may surge from the current 8% to a staggering 25%.

Let us now direct our attention to key developments that may sway the markets on this eventful Monday:

  • ECB board member Isabel Schnabel, ECB Vice President Luis de Guindos, and ECB chief economist Philip Lane shall grace the stage as speakers of note.
  • U.S. stock and bond markets have closed their doors for the day, while the NAHB

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