Global Markets – Stocks start central bank big week near peak

* Global stocks rose 0.2%, just below the record high

* Nikkei rises after LDP retains majority in Japan

A watershed week for monetary policy led by the Federal Reserve

* Calm bond markets. The US dollar maintains gains on Friday

Written by Danilo Masoni

MILAN (Reuters) – Global stocks kicked off a big week of central bank meetings near record levels, buoyed by bets on fiscal stimulus in Japan and not deterred by concerns about interest rate hikes that instead weighed heavily on bonds.

The MSCI global stock index rose 0.2% by 1230 GMT on Monday, approaching a record high hit in September and underpinning the gains seen over the past few weeks when optimism about earnings season offset concerns about inflation pressures and a slowing economic recovery.

Japan’s Nikkei rose 2.6% after Prime Minister Fumio Kishida’s Liberal Democratic Party scored an unexpectedly comfortable victory, raising hopes for political stability and stimulus in the next term.

Trade in stocks elsewhere was weak, with the MSCI Asia-Pacific shares outside Japan down 0.2% by selling in Hong Kong after data showed a more-than-expected contraction in Chinese factory activity.

S&P 500 and Nasdaq futures rose 0.3-0.4%.

“While bears continue to point to a myriad of concerns, we believe the risk-return for equities remains positive,” said Mislav Matika, strategist at JP Morgan, also pointing to signs of easing supply constraints and energy price pressures.

He added, “The Fed is starting to deteriorate, but we believe that major central banks will remain hawkish…Equities are likely to bear tapering off, and we have argued that internal market leadership will become more volatile on a cyclical level.”

Bond markets calmed after last week’s brutal sell-off as investors frightened by inflation pressures moved into prices in a faster policy normalization ahead of a number of central bank meetings this week including in the US, UK and Australia.

The two-year Treasury yield, which rose to a nearly 20-month high of 0.5640% last week, was up 1.6 basis points at 0.5169%, while the 10-year Treasury yield was up 1.9 basis points at 1.5821%. .

In Europe, the 10-year yield in Germany, the benchmark for the eurozone, rose 1.2 basis points to -0.082% but held below Friday’s peak at -0.064%.

“I think we may come out of last week’s peak yield volatility, or at least out of the previous peak price-raising fever,” said John Briggs, strategist at NatWest Markets. “A lot of things that have gone parabolic and the expectations of a market price hike bringing the market to a boil at least seem to be calming down a bit.”

The US dollar consolidated its gains ahead of the Federal Reserve meeting, which is widely expected to announce a reduction in stimulus.

The dollar was 0.1% weaker against a basket of six competitors, while hitting a 1-1/2 week high against the yen, as the safe-haven Japanese currency weakened after the weekend elections.

Commodities also stabilized with a further drop in Chinese coal prices pushing them below last month’s high of 50%. Oil prices reversed earlier declines with Brent crude futures up 1% at $84.56 a barrel, buoyed by strong demand expectations.

Live Meetings

The Federal Reserve is the most important event in a week filled with central bank meetings likely to move the markets, with the possibility of policy adjustments at the Bank of England and the Reserve Bank of Australia.

The Federal Reserve, which concludes its two-day meeting on Wednesday, is expected to say it will begin to scale back bond purchases, though markets focus on clues about a rate hike.

Fed fund futures are pricing in increases starting in the early second half of 2022 and Goldman Sachs has withdrawn its increase forecast to July next year from the third quarter of 2023.

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

They added: “The Bank of England is likely to raise rates (and it appears) that the RBA has abandoned the yield curve linkage.”

The pricing of the swaps suggests there is a better chance than break of a break-even BoE lift on Thursday, while the RBA is likely to make some sort of guidance adjustment after pulling back to defend its yield target on Monday.

Sterling fell 0.1 percent to $1.3675.

Gold rose 0.2% after Friday’s losses amid caution ahead of the Federal Reserve’s meeting. Bitcoin rose 1.3% to $62,112.

(Reporting by Danilo Masononi and Tom Westbrook; Editing by Supershaw Saho and Andrew Heavens)

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