Citi: Central Bank Meetings Could Make This Week One of 'Global Repricing'

It could be a bumpy week.

The Fed and BOJ Ripple Effect on Emerging Markets

Time to buckle up, as this week is poised to be a big one for markets across the globe.

Investors are bracing for a two-day U.S. Federal Reserve meeting, and a crucial gathering among Bank of Japan (BOJ) officials that could send equal if not bigger shockwaves through the markets. Global stocks rose on Monday driven in part by expectations that the central-bank meetings will conclude on a dovish note.

But the uptick in sentiment that's followed a global sell-off last week could come to an abrupt end if policy makers' pronouncements surprise the markets, analysts say.

"It is going to be a crucial week for global macro risk, as the BOJ and the Fed convene to decide on interest rates," write analysts at Citigroup Inc., led by David Lubin on Monday. "We believe the post-BOJ/Fed price action may end up being more nervous than many investors originally thought ... It could be a week of global repricing."

Amid dovish speeches from a slew of Fed governors, a clutch of U.S. economic data that hasn't come in strong enough to convince market participants, and a rise in market volatility, odds of a September Fed rate hike have fallen from 34 percent at the beginning of the month to 20 percent today.

But hawkish statements from the Fed combined with market doubts about the BOJ's strategy to reflate the Asian economy could make market volatility flare up again. 

"A risk-on start to the week but it's how the Fed positions the market for a December hike, and whether the BOJ tries to get the curve steeper and yen down, which matters," writes Kit Juckes, global strategist at Societe Generale SA, in a research note on Monday.

Barclays Plc expects the Fed to go against market expectations. "We retain our outlook for a rate hike in September," the team, led by Michael Gapen, said in a note published Monday, citing diminishing external risks to the U.S. economy. Nevertheless, the analysts say the September rate call is a close one, and Federal officials could instead send a hawkish signal about the prospect of a December rate hike. 

Other analysts, such as those at Goldman Sachs Group Inc, have pushed back their Fed-hike calls to December this year from September. 

Chetan Ahya, economist at Morgan Stanley, suggests central bankers this week will signal that the global economy will continue to muddle through deflationary pressures for the rest of the year, with the BOJ expanding its stimulus policies. But he adds: "Rather than watching for the next central bank move, we think that the next important development to monitor on the policy front is the rhetoric or action around fiscal policy."

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