GLOBAL MARKETS-Dollar bond yields rise ahead of central rate hikes
Stocks choppy ahead of central bank interest rate hikes
Grains rise as Russia quits Black Sea transit pact
Yuan tumbles as Chinese factory activity unexpectedly contracts
Dollar regains strength ahead of likely 75 basis point Fed hike on Wednesday
By Mark Jones
LONDON, Oct 31 (Reuters) – Stocks stagnated and dollar and bond yields edged higher on Monday as record eurozone inflation, weak Chinese data and Russia’s withdrawal from a crucial pact on grains prepared traders for another bumper rate hike from the Federal Reserve this week.
A potentially pivotal week for U.S. monetary policy received a new twist from renewed “terminal rate” speculation, with worrying growth signals from China and global inflation fears also fueled by rising agricultural prices.
Wall Street futures fell 0.3% after a sharp rise in US markets on Friday, while European stocks were broadly flat as weaker-than-expected Chinese factory data held mining sectors steady. <.sxpp> and oil and gas in the red.
Eurozone inflation also beat economists’ expectations, hitting a record 10.7% year-on-year, which will make for a more uncomfortable reading for the European Central Bank, which is targeting 2% price growth.
Coupled with news that Italy’s economy grew much stronger than expected in the third quarter, eurozone bond yields rose, although the euro succumbed to renewed US dollar strength.
“A lot of data is coming out this week and a lot of central banks are coming together,” said Societe Generale strategist Kit Juckes.
“The striking news so far (today) is that China is slowing down… We’ll see what Australia does tomorrow, then the Fed on Wednesday and the Bank of England on Thursday,” he added, making reference to rate hikes.
Russia’s withdrawal from a deal allowing Ukrainian grain shipments to reach global buyers this weekend saw wheat futures prices jump more than 8% at one point, before paring gains to about 6% or $8.75 a bushel in Europe.
Moscow on Saturday suspended its participation in the Black Sea deal in response to what it called a major Ukrainian drone attack on its fleet in Crimea annexed to Russia.
Twelve grain-carrying ships, however, managed to leave Ukrainian ports on Monday, suggesting that Moscow had refrained from reimposing a full-scale blockade for now.
“Depending on the scramble to replace expected Ukrainian shipments, prices could even hit double digits for a while,” said Commonwealth Bank of Australia strategist Tobin Gorey. Palm oil futures rose almost 5%.
Overnight, MSCI’s broadest index of Asia-Pacific stocks outside Japan rose 0.2%, although Chinese stocks were held down by an unexpected drop in Chinese factory data. this month will be the tenth consecutive monthly decline for the regional index.
The yuan also fell again and is heading for its eighth consecutive monthly fall – its longest losing streak since 1994.
The resignation of the chairman of Beijing-based property developer Longfor Group has also unnerved investors, with shares falling 20% in Hong Kong and the sector under pressure.
In contrast, the Japanese Nikkei ended up 1.8% and is expected to have its best month in nearly two years amid a continued decline in the yen which is helping exporting businesses.
The mixed performance follows an erratic earnings season on Wall Street and with bond and money markets tempering some bets on a possible change in tone from the Fed this week. The dollar, after posting two weeks of losses, stabilized on Monday and gained 0.5% against the yen.
“Things had gotten too pessimistic,” Jun Bei Liu, portfolio manager at Tribeca Investment Partners in Sydney, said of the recent gains. The sharp declines in US tech giants may signal enough bad news is already in the price, she said.
Yet Treasuries still slipped slightly, with benchmark 10-year yields rising 2 basis points to 4.0375%, while Germany’s 10-year government bond yield, the benchmark eurozone, rose 3 basis points (bps) to 2.130%.
The focus also shifted to Brazilian markets after left-wing leader Luiz Inacio Lula da Silva narrowly beat right-wing President Jair Bolsonaro in a runoff election on Sunday.
Early indications pointed to a bumpy ride with speculation swirling around the makeup of Lula’s cabinet and the risk of Bolsonaro challenging the narrow result. Shares of U.S.-listed Brazilian companies such as oil major Petrobras and iron ore miner Vale fell 9.7% and 2.9% respectively.
The Fed meanwhile is all but certain to raise rates by 75 basis points on Wednesday as markets focus on communicating the outlook.
The latest round of hopes for a change in tone from the Fed appear to stem from a Wall Street Journal article two weeks ago, signaling a possible discussion of slowing bullishness.
But a report by the same author over the weekend highlighted a long period of high rates and traders have now tempered the initial optimism, pegging the funds rate at nearly 5% by May next year. .
In oil markets, Brent crude futures fell 1% to $94.65 a barrel, while spot gold was slightly lower at $1,637 an ounce in precious metals markets.
“We have to be very careful and distinguish between central bank peaks and central bank pivots,” said John Briggs, head of economics and strategy at NatWest Markets.
“The spike means the year-to-date trends of rising yields, rising dollar and weakness in risk assets may lose momentum, but I think we need more visibility. on a pivot to completely reverse all of that.”
(Additional reporting by Tom Westbrook in Singapore; Editing by Kirsten Donovan and Angus MacSwan)