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Tags: Federal Reserve | European Central Bank | Bank of England | interest rates | inflation

Global Equities Trade Mixed, Brace for Fed Stimulus Reversal

interest rates

Wednesday, 03 November 2021 11:49 AM EDT

World shares traded at record-high levels on Wednesday while U.S. Treasury and euro zone government bond yields ticked down as investors anticipated the United States to start cutting pandemic-era monetary stimulus.

The U.S. Federal Reserve is expected to announce the tapering of its $120 billion-a-month asset purchase program in its policy statement at 1800 GMT, a move widely seen as marking a new chapter in the world's policy response to COVID-19.

European stock markets rose to an all-time high for a second day in a row after Wall Street's main indexes also scored new records on Tuesday. Wall Street edged lower as investors looked ahead to the Federal Reserve's widely expected move to signal the withdrawal of its pandemic-era support, while MSCI's all-country world index, which tracks equity performance in 50 nations, shed 0.04%.

The Tokyo bourse was closed for a public holiday while MSCI's broadest index of Asia-Pacific shares outside Japan closed 0.12% lower, while Japan's Nikkei lost 0.43%.

Boosted by fiscal and monetary stimulus, global stocks have thrived during the economic rebound after the recession triggered by the first wave of COVID-19 infections in 2020.

"From a pure macro perspective, negative real rates mean there is no alternative to stocks, while at the same time the earnings cycle is very strong," said Salman Ahmed, global head of macro at Fidelity International.

'Negative Real Rates' Would Pressure Equities

"Negative real rates is a very powerful force," he added, as investors wonder whether equities are at risk of losing their edge against other asset classes with the direction of travel for interest rates firmly on the rise.

Markets are almost certain the Fed will taper but are looking to see if policymakers will give hints about the possibility of rate hikes next year.

Fed officials are trying to maintain a difficult balancing act by giving the economy as much time as possible to recover while tightening policy soon enough to contain inflation.

"Fed Chairman Jay Powell, who is seeking renomination for another four-year term, will likely renew his calls for patience before hiking interest rates," argued Thomas Costerg, senior economist at Pictet wealth.

"We remain of the view that the Fed will seek to keep its interest rates below the rate of inflation in the long run, as it remains implicitly focused on the high level of debt in the U.S. economy," he added.

All Eyes on Fed, ECB and BOE

Meanwhile in Europe, European Central Bank (ECB) President Christine Lagarde pushed back on market bets on an interest rate hike as soon as next October, saying it was "very unlikely" such a move would happen in 2022.

Euro zone government bond yields retreated and Germany's 10-year Bund yield fell to a one-month low of -0.19% .

The yield on 10-year Treasury notes was up 1.9 basis points to 1.566%.

Fixed income investors are also eager to find out on Thursday whether the Bank of England will become the first major central bank to raise borrowing costs after the coronavirus crisis.

The dollar edged higher on Wednesday, holding near recent peaks versus the euro and the yen.

The Aussie dollar picked up 0.15% after having dropped 1.2% against the dollar a day earlier following more dovish remarks from the Reserve Bank of Australia, even as it abandoned its short-term yield target.

U.S. crude stocks and distillate inventories rose while gasoline inventories fell, the Energy Information Administration said on Wednesday.

Crude inventories rose by 3.3 million barrels in the week to Oct. 29 to 434.1 million barrels, compared with analysts' expectations in a Reuters poll for a 2.2 million-barrel rise.

U.S. crude recently fell 3.1% to $81.31 per barrel and Brent was at $82.49, down 2.63% on the day.

Spot gold dropped 1.4% to $1,763.05 an ounce.

© 2024 Thomson/Reuters. All rights reserved.

World shares traded at record-high levels on Wednesday while U.S. Treasury and euro zone government bond yields ticked down as investors anticipated the United States to start cutting pandemic-era monetary stimulus.
Federal Reserve, European Central Bank, Bank of England, interest rates, inflation
Wednesday, 03 November 2021 11:49 AM
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