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Global stocks at record highs ahead of Fed meet

Global stocks

The MSCI all-country world equity index, the S&P 500 and the STOXX Europe 600 index all finished at record highs on Friday

World shares hit record highs Monday, while US bond yields were near three-month lows as investors expected the Fed to remain dovish.

Japan’s Nikkei advanced 0.35 per cent while MSCI’s broadest index of Asia-Pacific shares outside Japan was 0.1 per cent lower. Stock markets in China, Hong Kong and Australia were closed for a holiday.

Major global indices including the MSCI all-country world equity index, the US S&P 500 and the pan-regional STOXX Europe 600 index all finished at record highs on Friday. This comes even as US inflation data exceeded market expectations.

One big factor is that the Fed has been saying inflation will be transitory and that it will maintain loose monetary policy, said Norihiro Fujito, chief investment strategist at Mitsubishi UFJ Morgan Stanley Securities. But another factor to consider is that markets are simply awash with cash.

The yield on 10-year US Treasuries was at 1.465 per cent ahead of the Fed’s policy meeting this week, having dropped to 1.428 – a three-month low per cent – on Friday.

It is becoming painful for bond bears and I bet the 10-year yield will fall to 1.25 per cent or even 1 per cent, said Akira Takei, fund manager at Asset Management One, noting that US economic recovery is likely to slow in coming months.

The US employment rate was 61 per cent before the pandemic. It has recovered to 58 per cent, but I expect its recovery to slow. After the great financial crisis (of 2008), it has never recovered to its pre-crisis levels, Takei said.

Speculators are also building up long positions in US debt, with their net long positions in US bond futures hitting the highest level since October 2017, US financial watchdog data showed.

The Fed is expected to continue with its dovish stance at its two-day meeting from Tuesday.

While some Fed board members have said the bank should start considering tapering its bond buying, most investors think a majority of policymakers still prefer to wait a bit more.

There will probably be no surprise from the Fed this week, said Mitsubishi UFJ’s Fujito. But in the longer term, there’s clear risk of the Fed’s stimulus becoming excessive. There is little justification for buying mortgage bonds when housing markets are becoming so hot.

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