World stocks hit another record high on Monday and the dollar reached an eight-week peak against the yen on expectations the U.S. Federal Reserve will unveil plans this week to trim its bloated balance sheet.
With no new actions by North Korea over the weekend, investors pushed Europe’s main share index to a six-week high. MSCI’s broadest index of Asia-Pacific shares outside Japan had earlier risen to heights not visited since late 2007.
That nudged MSCI’s index of world stocks to a new all-time high while futures prices pointed to a new record high on Wall Street.
“The Fed could well set the balance-sheet-reduction process in motion,” said Daniel Lenz, an analyst at DZ Bank in Frankfurt. Such a move would be part of a global reversal of cheap money policy.
An address by U.S. President Donald Trump to world leaders at the United Nations on Tuesday and elections in Germany and New Zealand will add extra political uncertainty to the mix this week.
But the main event will be the Fed’s meeting on Tuesday and Wednesday, at which it is likely to take another step towards policy normalisation in what is rapidly becoming a worldwide trend.
Canada has already raised interest rates twice in recent months, while the Bank of England shocked many last week by flagging its own coming increases. The European Central Bank is meanwhile expected to shed more light on plans to exit its extraordinary stimulus next month.
Yet persistently subdued inflation despite a pick-up in global growth remains the “trillion dollar” question for central banks looking to normalise policy, a report from Bank for International Settlements said on Sunday.
As such, investors are far from persuaded the Fed will move on rates again this year, with a December change put at less than a 50 percent probability in the futures market <0#FF:>.
“It is fair to say that in our recent travels most of the investors we have spoken to question not just a December hike, but whether the Fed will hike at all again this cycle,” said Tom Porcelli, chief U.S. economist at RBC Capital Markets.
“When you press investors on the why, the standard reply is the lack of inflationary pressures.”
U.S. government bond yields <US10YT=RR> jumped a hefty 14 basis points last week, but were little changed on Monday, as were most developed bond markets.
In Europe, the eye-catching move was a sharp slide in Portuguese yields — and rise in prices — after the country regained an investment grade rating after 5-1/2 years.
In currencies, the dollar gained as much as 0.5 percent against the yen to hit 111.42, its highest since late July. The Bank of Japan is widely expected to maintain its massive asset buying campaign at a meeting on Thursday.
Political uncertainty may have a part to play in the BOJ’s thinking. Sources told Reuters on Sunday that Japanese Prime Minister Shinzo Abe was considering calling a snap election for as early as next month to take advantage of his improved approval ratings and of disarray in the main opposition party.
Against a basket of currencies, the dollar was flat at 91.870 after giving up earlier gains.
Sterling touched its highest since the Brexit vote on Monday after notching its best week in almost nine years against a currency basket.
Investors will be keeping a close eye on a speech by BOE Governor Mark Carney later on Monday. HSBC sees two more rate hikes by the BoE between now and the end of next year.
Talk of monetary tightening and a bounce in the dollar put gold on the defensive. The precious metal was off 0.4 percent at $1,314.43 an ounce.
U.S. crude oil prices rose above $50 per barrel on Monday and were near last week’s multi-month highs as the number of U.S. rigs drilling for new production fell and refineries continued to restart after getting knocked out by Hurricane Harvey.
Source: Reuters (Reporting by John Geddie in LONDON and Wayne Cole in SYDNEY; Editing by Jeremy Gaunt)