Surprising Swiss Rate Hike Makes Markets Nervous Ahead of BOJ

By Tom Westbrook

SINGAPORE (Reuters) – Global stocks headed for their worst week on Friday since the pandemic collapse of markets in March 2020, as investors feared sharp rate hikes that would push economies into recession, while growth fears and a rising Swiss franc weighed on the US dollar.

An overnight rate hike of 50 basis points by the Swiss National Bank sent the franc to its biggest rise in seven years, forced the cancellation of carry trades and triggered a new round of concerns that the rising global rates will stifle growth.

It has also left the Bank of Japan completely alone in its low rate scenarios, stoking nerves that politicians will tighten or abandon them later on Friday.

That risk had given the yen some support this week, but it was down almost 1% against the dollar at 133.27 per dollar in morning trading. [FRX/]

MSCI’s broader index of Asia-Pacific shares outside of Japan fell to a five-week low, dragged down by selling in Australia, where the ASX 200 fell 2% and was on track for a 7% weekly decline. Japan’s Nikkei fell 2.4%, while shares in China, where rate hikes are not an imminent concern, were outliers with modest gains.

Overnight, the Nasdaq tanked, falling 4%, and the S&P 500 fell 3.3%. Global stocks are down 5.7% in the week so far, on track for the steepest weekly percentage drop in more than two years.

The Bank of England also announced a smaller-than-expected 25 basis point rate hike overnight, which has only served to bolster bets of even bigger hikes to come later.

“Global money is getting more expensive, and it still has some way to go,” said Rob Carnell, Asian economist at ING.

All eyes will be on the BOJ during Asian time, with a decision expected between 0230 GMT and 0400 GMT.

Trading in Japan’s generally dovish bond market has been wild in recent days as speculators pile into short futures and cash bonds in a bet on the BOJ’s capitulation.

Ten-year Japanese government bonds traded just above the BOJ’s de facto 0.25% yield target on Friday morning. [JP/]

Although he doesn’t foresee any change, Deutsche Bank strategist Alan Ruskin expects markets to react violently to any policy change. “JGB 10y yield expected to drop by 50bps…USD/JPY with initial significant 5-figure decline (and) Nikkei -5%,” he said.

ONE WAY

Bonds had a wild session overnight with German debt canceled following Swiss rate hikes and a European Central Bank plan to direct its bond buying towards peripheral nations, before growth fears clipped the biggest losses. .

The 2-year German Bund yield ended the session up 8.5bps to 1.152% and the 10-year German Bund yield rose 5bps to 1.703%. [GVD/EUR]

US housing and labor data came in weak on Thursday, following disappointing retail sales figures, with concerns hitting the dollar and helping Treasuries.

Benchmark 10-year Treasury yields fell nearly 10 basis points overnight, but stumbled higher to 3.2461% in Asian morning trading. Yields rise when prices fall. [US/]

Sterling rose 1.4% against the dollar overnight in anticipation of aggressive Bank of England hikes ahead. The euro rose 1% and hovered around $1.0535 in Asia.

“One phenomenon in the market appears to be a reaction that if a central bank doesn’t move aggressively, yields and the price of risk are closer to rate hikes going forward,” said John Briggs, strategist at NatWest Markets. .

“Alternatively, markets may be continually adjusting to a prospect of higher global policy rates…as the global central bank’s policy push is one-way.”

Another factor that dragged down the dollar was the rise of the Swiss franc as it is used as a funding currency and is often exchanged for dollars before they are exchanged for high yields meaning dollars are sold when that trade is reversed.

Growth fears led oil on a brief overnight trip lower before prices stabilized. Brent crude futures were trading at $118.96 a barrel. Gold stood at $1,846 an ounce and bitcoin remained under pressure at $20,700.

(Reporting by Tom Westbrook; Editing by Lincoln Feast.)

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