Marketmind: Policy peak?

4:03 pm Wednesday, October 26th, 2022

By Jamie McGeever

(Reuters) – A look at the day ahead in Asian markets from Jamie McGeever

First Australia, now Canada. Who’ll be next to blink on interest rates?

The Bank of Canada on Wednesday raised rates by 50 basis points, less than the 75 bps markets had expected. This surprise mirrored the Reserve Bank of Australia’s half point hike three weeks ago, when investors had again positioned for an additional 25 bps of tightening.

“We are getting closer to the end of this tightening phase,” BOC chief Tiff Macklem said, citing recession fears.

That’s two of the world’s major central banks now signaling that the peak in rates is in sight, while Bank of England Deputy Governor Ben Broadbent said last week that the market’s rate path was too aggressive.

The European Central Bank and Bank of Japan are up next with policy decisions in the next 48 hours. Although they are at very different stages of the cycle – the BOJ hasn’t even started tightening yet – dovish surprises could add fuel to the ‘risk on’ rally currently underway.

GRAPHIC: G10 interest rates – 2022 moves https://fingfx.thomsonreuters.com/gfx/mkt/xmvjkgnoxpr/G10rates.jpg

Ok, Wall Street struggled on Wednesday in part due to earnings misses from Microsoft and Alphabet, but the S&P 500 hit a six-week high intraday and is up 7% this month. The VIX volatility index hit a six-week low, while bond yields fell sharply for a second day.

The dollar is also falling, another development that should in theory ease financial conditions and support risk assets. It is down 2% this week, on track for its biggest weekly fall since the COVID-19 pandemic’s darkest days in March 2020.

Only time will tell how much of all this is simply a snap back in extreme positioning. But if the remaining heavyweight U.S. earnings this week beat forecasts and the ECB and BOJ play ball, it could have further to run.

Three key developments that could provide more direction to markets on Thursday:

ECB rate decision (expected 75 bps hike)

U.S. advance GDP (Q3)

U.S. earnings (Meta, Apple, Amazon)

(Reporting by Jamie McGeever in Orlando, Fla.; Editing by Josie Kao)