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Will more central banks shift policy towards tightening?

FT markets are watching Sweden’s Riksbank, S&P sector rotation, yen weakness, and sterling credit markets as a new trading week looms

Will the shift in central bankers’ tone ripple outwards?

Last week’s flurry of commentary from UK and EU central bankers triggered investor suspicions that a concerted effort was under way to shift policy towards a tightening stance. Expectations rose of early UK interest rate rises and a wind-down of the ECB’s bond-buying programme.

What remains to be seen, however, is the extent to which this sunnier tone is taken up by policymakers in other countries. The first test will come on Tuesday, when Sweden’s Riksbank announces its latest interest rate decision.

‘’We remain cognisant that the Riksbank have frequently disappointed in the past and this remains a risk, but their previous insistence on an easing bias is looking increasingly at odds with economic reality and out of step with other major central banks,’’ say analysts at Bank of America Merrill Lynch.

The Swedish base rate has been in negative territory for the past two years and now sits at -0.5 per cent, despite having some of the strongest growth in Europe.

Sweden has also been engaged in a monetary easing programme which has seen it buy up 40 per cent of the country’s outstanding stock of government debt, totalling SKR275bn, between February 2015 and April this year.

That figure is set to rise by another SKR15bn by the end of 2017 thanks to a surprise extension to the quantitative easing announced by the Riksbank in April.

So far the central bank has insisted that it will remain true to its mandate of targeting a 2 per cent inflation rate, requiring continued bond-buying and a negative base rate of interest. Inflation is currently running at an annual rate of 1.7 per cent.

However the bank has acknowledged several times how closely its economy is linked to the eurozone, and therefore how big an influence the ECB’s decisions will have on its thinking. Kate Allen

Does the rotation between tech and financials continue?

A higher ‘risk free’ rate in the form of a rising 10-year government bond yield has hardly helped the cause for growth stocks, led by technology high flyers.

A backdrop of low bond yields and volatility has done much to propel US tech shares well ahead of the broad market this year in terms of performance. But June was less kind to the sector, suggesting a degree of profit-taking ahead of the second quarter ending. Globally, tech has also performed well, in China, Taiwan and South Korea.

In periods of rising bond yields, the laggard tends to be growth companies, as the ‘’risk free rate’’ for discounting the value of their future cash flows climbs.

But higher long term bond yields has been well received by one sector; financials. In fact a double boost from being allowed to pay higher dividends after passing Federal Reserve stress tests plus a steeper yield curve generated a dominant performance from S&P financials during June.

That leaves S&P tech and financials roughly in line with each other for the second quarter, with a 4 per cent gain.

Watching bond yields ahead of second-quarter earnings results later in July will determine the fate of the current rotation. Michael Mackenzie

Does yen weakness escalate the carry trade?

Amid the clamour of central banks looking to pull back from easy money, there is one notable exception; the Bank of Japan. That has the currency market sizing up the yen for further weakness, particularly versus the euro. Since mid-April the yen has weakened from ¥115 towards ¥128.

‘The very early stages of the latest chapter in the JPY carry trade hardly bear comparison to eras past,’’ says BNY, who also warn that dangers lurk among those targeting a weaker yen.

For starters there is a risk that inflation does surprise to the upside in Japan while the hawkish talk of other central banks could well dampen reflation in the eurozone and elsewhere.

‘’The policy shifts to which central banks are alluding remain conditional upon the materialisation of inflation — inflation which may yet fall prey to the currency appreciation these shifts are encouraging,’’ says the bank. Michael Mackenzie

Will sterling credit markets remain resilient?

Ford is expected to price a securitisation of auto receivables this week — a potential test of appetite for sterling credit that has so far been undimmed by the surprise election result and the launch of Brexit negotiations.

The roadshow for the deal will launch on Monday. While other sterling issuers, such as Clydesdale and Skipton building society, have been able to sell new bonds over the past month at attractive rates, an auto securitisation is seen as a clear measure of jitters over rising consumer credit in the UK.

Last week, the Bank of England raised its so-called “countercyclical buffer”, increasing the amount of capital banks need and effectively reducing their leverage.

“If the market is going to express any reservation around consumer, then it will be in the pricing on this ABS transaction,” said one banker.

Securitisation, where loans are packaged together and sold on as bonds, is an important source of funding for the auto industry, which in turn has benefited from rising consumer borrowing over recent years. Thomas Hale