Stocks reach record high on the eve of Fed meeting

WORLD stocks hit a record high yesterday, and the dollar reached an eight-week peak against the yen on expectations that the US Federal Reserve will this week announce the trimming of its balance sheet, part of a reversal of cheap money worldwide.

As investors breathed a sigh of relief that the weekend passed with no new provocation by North Korea, Europe’s main share index opened at a six-week high.

MSCI’s broadest index of AsiaPacific 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, adding to gains seen on Friday, when Wall Street set its own record level.

“The Federal Open Market Committee’s latest verdict will be of special interest,” said Daniel Lenz, an analyst at DZ Bank in Frankfurt. “The Fed could well set the balance-sheet-reduction process in motion.”

Elections

An address by US President Donald Trump to world leaders at the UN today, 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 today and tomorrow, at which it is likely to take another step towards policy normalisation amid what is rapidly becoming a global trend.

Canada has already hiked interest rates twice in recent months, while the Bank of England (BoE) shocked many last week by flagging its own coming increases.

The European Central Bank is expected to shed more light on plans to exit its extraordinary stimulus in October.

But persistently subdued global inflation despite a pick-up in 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 convinced that 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.

“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 US economist at RBC Capital Markets.

“When you press investors on the why, the standard reply is the lack of inflationary pressures.”

US government bond yields jumped a hefty 14 basis points last week, but were little changed yesterday, as were most developed bond markets. – Reuters