Election surprise lifts Nikkei, Fed keeps dollar bid

By Tom Westbrook

SINGAPORE (Reuters) – Stocks edged higher on Monday, led by a post-election jump in Japan’s Nikkei, though bonds wobbled and the dollar firmed as traders braced for central bank meetings in Britain, Australia and the United States to define the rates policy outlook.

Japan’s Nikkei rose 2.3% to a one-month high after Prime Minister Fumio Kishida’s Liberal Democratic Party did better than expected at Sunday’s election, with exit polls showing the party easily retaining a majority.

Trade elsewhere was more muted, with MSCI’s index of Asia-Pacific shares outside Japan up marginally. Weekend data showing a sharper-than-expected contraction of Chinese factory activity weighed on the mood.

S&P 500 futures rose 0.3%. [.N]

The Fed is the highlight of a week full of central bank meetings likely to move markets, with policy adjustments possible at the Bank of England and Reserve Bank of Australia, as inflation puts upward pressure on the rates outlook.

The Fed, which concludes a two-day meeting on Wednesday, is expected to say it will start to taper bond purchases, though markets’ focus is on clues about rates lift-off.

Fed funds futures are pricing hikes beginning early in the second half of 2022 and Goldman Sachs on Friday pulled forward its hike forecast to July from Q3 2023.

“While maintaining the view that most of the inflation we are seeing will prove transitory, a risk management mindset has taken over, and developed market central banks are now changing tack,” analysts at Goldman Sachs said in a late-Friday note.

“The Bank of England looks likely to raise rates (and) the Reserve Bank of Australia appears to have abandoned its yield curve peg … our U.S. economists now expect the Federal Reserve to start raising rates in July 2022, compared to Q3 2023 previously.”

BONDS ON EDGE

The prospect of higher rates sooner has roiled short-dated bonds around the world, straining liquidity in recent weeks, though Monday trade was a little calmer.

Two-year U.S. Treasury yields rose 2 basis points in Asia trade to 0.5227%. Benchmark 10-year yields rose 1.2 basis points to 1.5732%. October was the worst month in more than three-years for two-year Treasuries. [US/]

A bid crept back in to Australia’s battered bond market despite the central bank again declining to defend its yield target. Three-year Australian government bond futures were last up 12.5 ticks at 98.720. [AUD/]

The RBA meets on Tuesday and will likely make some sort of guidance adjustment given it has allowed the yield on the April 2024 bond it had targeted at 0.1% was as high as 0.818% on Monday.

In currency markets the dollar held sharp Friday gains and inched a little higher on the risk-sensitive Australian and New Zealand dollars. It rose as far as 114.26 yen and climbed 0.1% to $1.1554 per euro [FRX/]

Sterling slipped to a two-week low of $1.3663 as traders reckon a small rate hike on Thursday might come with a dovish outlook.

“The guidance on whether more hikes are to come is obviously key and many expect another hike in February. However, like the RBA and Fed, the BoE will want to push back on market pricing,” said Chris Weston, head of research at broker Pepperstone in Melbourne.

“Sterling is trading heavy … and the bias is for a move into $1.3600.”

Commodity prices eased a tad with benchmark Brent crude futures down 0.2% at $83.45 a barrel in early trade and U.S. crude futures down 0.6% to $83.06 a barrel. [O/R]

The stronger dollar weighed on gold, which sat at $1,781 an ounce. [GOL/]

(Reporting by Tom Westbrook; Editing by Sam Holmes)

By Tom Westbrook

SINGAPORE (Reuters) – Stocks edged higher on Monday, led by a post-election jump in Japan’s Nikkei, though bonds wobbled and the dollar firmed as traders braced for central bank meetings in Britain, Australia and the United States to define the rates policy outlook.

Japan’s Nikkei rose 2.3% to a one-month high after Prime Minister Fumio Kishida’s Liberal Democratic Party did better than expected at Sunday’s election, with exit polls showing the party easily retaining a majority.

Trade elsewhere was more muted, with MSCI’s index of Asia-Pacific shares outside Japan up marginally. Weekend data showing a sharper-than-expected contraction of Chinese factory activity weighed on the mood.

S&P 500 futures rose 0.3%. [.N]

The Fed is the highlight of a week full of central bank meetings likely to move markets, with policy adjustments possible at the Bank of England and Reserve Bank of Australia, as inflation puts upward pressure on the rates outlook.

The Fed, which concludes a two-day meeting on Wednesday, is expected to say it will start to taper bond purchases, though markets’ focus is on clues about rates lift-off.

Fed funds futures are pricing hikes beginning early in the second half of 2022 and Goldman Sachs on Friday pulled forward its hike forecast to July from Q3 2023.

“While maintaining the view that most of the inflation we are seeing will prove transitory, a risk management mindset has taken over, and developed market central banks are now changing tack,” analysts at Goldman Sachs said in a late-Friday note.

“The Bank of England looks likely to raise rates (and) the Reserve Bank of Australia appears to have abandoned its yield curve peg … our U.S. economists now expect the Federal Reserve to start raising rates in July 2022, compared to Q3 2023 previously.”

BONDS ON EDGE

The prospect of higher rates sooner has roiled short-dated bonds around the world, straining liquidity in recent weeks, though Monday trade was a little calmer.

Two-year U.S. Treasury yields rose 2 basis points in Asia trade to 0.5227%. Benchmark 10-year yields rose 1.2 basis points to 1.5732%. October was the worst month in more than three-years for two-year Treasuries. [US/]

A bid crept back in to Australia’s battered bond market despite the central bank again declining to defend its yield target. Three-year Australian government bond futures were last up 12.5 ticks at 98.720. [AUD/]

The RBA meets on Tuesday and will likely make some sort of guidance adjustment given it has allowed the yield on the April 2024 bond it had targeted at 0.1% was as high as 0.818% on Monday.

In currency markets the dollar held sharp Friday gains and inched a little higher on the risk-sensitive Australian and New Zealand dollars. It rose as far as 114.26 yen and climbed 0.1% to $1.1554 per euro [FRX/]

Sterling slipped to a two-week low of $1.3663 as traders reckon a small rate hike on Thursday might come with a dovish outlook.

“The guidance on whether more hikes are to come is obviously key and many expect another hike in February. However, like the RBA and Fed, the BoE will want to push back on market pricing,” said Chris Weston, head of research at broker Pepperstone in Melbourne.

“Sterling is trading heavy … and the bias is for a move into $1.3600.”

Commodity prices eased a tad with benchmark Brent crude futures down 0.2% at $83.45 a barrel in early trade and U.S. crude futures down 0.6% to $83.06 a barrel. [O/R]

The stronger dollar weighed on gold, which sat at $1,781 an ounce. [GOL/]

(Reporting by Tom Westbrook; Editing by Sam Holmes)