GLOBAL MARKETS-Stocks kick off big central bank week near peaks

On Nov 1, 2021

* World stocks up 0.2%, just below record high

* Nikkei rallies after LDP retains majority in Japan

* Watershed week for monetary policy, led by Fed

* Bond markets calm down; U.S. dollar holds Friday gains

By Danilo Masoni

MILAN, Nov 1 (Reuters) – World stocks kicked off a big week for central bank meetings near record highs, helped by bets of fiscal stimulus in Japan and undeterred by concerns of interest rate hikes that have instead hit bonds hard.

The MSCI world equities index rose 0.2% by 1230 GMT on Monday, marching closer to the record high hit in September and consolidating the gains seen over the past few weeks when optimism over the earnings season offset worries over inflation pressures and a slowing economic recovery.

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

Trade elsewhere in equities was soft, with MSCI’s index of Asia-Pacific shares outside Japan dragged 0.2% lower by selling in Hong Kong after data showed a sharper-than-expected contraction of Chinese factory activity.

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

“While bears keep pointing to a myriad of concerns, we believe that the risk-reward for stocks is still positive,” JP Morgan strategist Mislav Matejka said, also citing signs of an easing in supply constraints and power price pressures.

“The Fed is starting to taper, but we believe that key central banks will stay dovish… Equities are likely to tolerate tapering and we have argued that the market internal leadership will turn more Cyclical,” he added.

Bond markets calmed down after the brutal sell-off last week when investors scared by inflation pressures moved to price in faster policy normalisation just ahead of a number of central bank meetings this week including in the U.S., UK and Australia.

The yield on two-year Treasuries, which had soared to an almost 20-month high of 0.5640% last week, was last up 1.6 basis points (bps) at 0.5169%, while 10-year Treasury yields were up 1.9 bps at 1.5821%.

In Europe, Germany’s 10-year yield, the benchmark for the euro area, rose 1.2 bps to -0.082% but held below Friday’s peak of -0.064%.

“I think we may come out of (the) week past peak yield volatility, or at least, past peak rate hike fever,” said NatWest Markets strategist John Briggs. “A lot of the things that went parabolic and took market rate hike expectations to a boil are at least looking like they are calming a bit.”

The U.S. dollar consolidated gains ahead of the Fed meeting which is widely expected to announce a tapering of stimulus.

The dollar was 0.1% softer against a basket six rivals, while it hit a 1-1/2-week high against the yen as the safe-haven Japanese currency weakened after the weekend elections.

Commodities also stabilised with a further drop in Chinese coal prices pushing them 50% below last month’s record high. Oil prices reversed earlier declines with…