Stocks drop as markets eye central banks

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HONG KONG: Stock markets stagnated Monday, with attention fixed on central bank policy before an ECB meeting this week and speculation on the outlook for US borrowing costs.

“Central bank uncertainty is festering as the markets grapple with elevated Fed rate hike expectations and as the European Central Bank is slated to deliver its monetary policy decision on Thursday,” said analysts at Charles Schwab as Wall Street opened flat.

World equities posted healthy gains at the end of last week as investors bet that the Federal Reserve would raise interest rates before the end of the year.

European Central Bank chief Mario Draghi will be under pressure this week to clarify the bank’s stimulus plans after investors were spooked by talk of an end to its massive bond-buying programme.

Eurozone official data released Monday showed inflation across the bloc rising to 0.4 percent in September year-on-year, unchanged from a prior estimate.

Europe’s main equities markets were on the back foot in afternoon trading.

London’s FTSE 100 index fell 0.8 percent and the pound remained under pressure amid reports of divisions between British finance minister Philip Hammond and other cabinet members over how the country should proceed with its exit from the EU, with some suggesting he may resign.

“Hammond is thought to prefer a plan in which migration curbs are delayed and Britain would pay into the EU budget for single market access,” noted Jasper Lawler, analyst at trading group CMC Markets.

Lower for longer

“It’s a stance that would be welcomed by markets,” he added.

The spokeswoman for Prime Minister Theresa May sought to play down any rift, telling reporters: “The prime minister has full confidence in the chancellor and the work that he is doing.”

Markets also continue to focus heavily on the Fed, whose boss Janet Yellen Friday suggested the US central bank would raise borrowing costs but at a steady pace.

Yellen said running a “high-pressure economy” could help it overcome the damage caused by the global financial crisis.

“If nothing else, this is another lower-for-longer prescription,” said Thomas Simons, senior economist at Jefferies LLC.

“However, these comments do not preclude a 25-basis-point rate hike this year as another step in the normalisation process,” he wrote in a note to clients.

Most experts predict a rise by December at the latest and are closely watching the release this week of US industrial output and inflation data.

The prospect of higher borrowing costs weighed on Asian markets in the morning but some staged a recovery as the day wore on.

Tokyo ended 0.3 percent higher, with a pick-up in the dollar against the yen helping exporters.