RPT-GLOBAL MARKETS WEEKAHEAD-Learning to live with higher rates

(Repeats item from Friday)

* ECB, BoE, BOJ rate meetings ahead

* Fed sounding more hawkish

* Investors look to life with tighter policy

By Jeremy Gaunt, European Investment Correspondent

LONDON, April 1 (Reuters) – The new quarter is bringing with
it a new danger for investors — the withdrawal of the easy
money that saw them through the financial crisis.

The European Central Bank is widely expected to raise
interest rates on Thursday, fearful that above-target inflation
will become embedded.

At the same time, members of the U.S. Federal Reserve have
been making hawkish sounds about what will happen when its
pump-priming quantitative easing programme closes in June. They
meet later in the month.

The Bank of England, meanwhile, should keep rates on hold
at its meeting on Thursday, but the panel’s tightening advocates
are getting noisier.

What is behind it all, of course, is the fact that the
global economy, including its lagging western bits, is doing
quite well and central banks want to make unusually
accommodative policy just that — unusual.

“When things get better, ironically, this is the time to
worry as authorities could withdraw support and subsequently
impact on the corresponding risk markets,” London & Capital told
its clients.

There are already signs that the prospect of higher interest
rates is weighing on the bond market, with the ECB’s likely move
particularly hard on the euro zone’s embattled peripheral debt
in Greece, Portugal and Ireland.

Overall, March was a month of extraordinary risks for
investors — from Japan’s triple disasters to civil war in
oil-producer Libya — yet there was no flight to the supposed
safety of bonds.

Reuters asset allocation polls for the month found that
global investors actually cut overall bond allocations as well
as generally walking away from government, investment grade and
high-yield fixed income. [ASSET/WRAP]

Investment bank Citi’s government bond returns data,
meanwhile, shows overall losses for March and the year as a
whole. In local currency terms, its World Government Bond Index
lost 0.14 percent in the month and 0.65 percent for the

It is not all because of interest rate expectations, but it
is hard to imagine this pressure will dissipate in the weeks
ahead as tightening approaches.


Graphic on interest rate expectations, click:


Graphic on Q1 asset performance, click:




The story for equities — which are barrelling along again
after cooling for much of March — is more complex.

Typically, the beginning of a tightening cycle is often good
for stocks because, as Klaus Wiener, head of research at
Generali Investments puts it, investors see the moves as a vote
of confidence in the economy.

The first hikes are also generally meaningful only as a
message rather than having a fundamental impact. The ECB, for
example, may raise rates from 1 percent to just 1.25 percent —
which would still be a negative real-term rate given inflation
is running at 2.6 percent.

The big impact comes later, when the tightening cycle starts
to bite on the economy and the yield curve flattens, essentially
making short-term borrowing expensive.

Wiener reckons that is a long way off, but does add that
there is a different wrinkle at the moment — easy monetary
policy in a number of places has included quantitative easing,
pumping money into markets by buying bonds.

Such a flood of money has been a major driver in the stock
market rally that began in summer last year and has lifted the
MSCI all-country world stock index (.MIWD00000PUS: Quote, Profile, Research) by 30 percent
or more.

“If they stopped adding liquidity, that would hurt a bit,”
he said.

Different rate expectations, meanwhile, have a profound
effect on currencies. The euro and dollar have already
strengthened while Japan’s yen has weakened.

The Bank of Japan on Thursday is expected to say it has left
rates on hold, but additional monetary easing cannot be ruled
out given the economic damage from the earthquake, tsunami and
nuclear breakdown.


What is allowing the other major central banks to start
thinking about or actually withdrawing their hugely
accommodative policies is the growing belief that the world
economy is not only on the mend but growing sustainably.

The banks have to balance the danger of allowing growth to
fire up inflation against tightening too soon and throwing the
baby out with the bathwater.

This makes investors even more keen than usual to get
evidence about how well various economies are faring.

March global services PMIs will take the temperature during
the coming week.

And the Organisation for Economic Cooperation and
Development will put out its latest economic outlook on Tuesday,
a taster ahead of the International Monetary Fund/World Bank
reports that accompany their spring meeting the following week.
(Editing by Stephen Nisbet)

RPT-GLOBAL MARKETS WEEKAHEAD-Learning to live with higher rates