Stocks rise slightly ahead of the Federal Reserve meeting, but concerns about a possible pause in interest rate increases are sparked by UK data.
Stocks rise slightly ahead of the Federal Reserve meeting, but concerns about a possible pause in interest rate increases are sparked by UK data.
European Stocks Rise as U.S. Treasury Yields Dip, Oil Prices Ease
Image: European stocks rising, U.S. Treasury yields dipping (source: Reuters)
LONDON, Sept 20 (ANBLE) – European stocks gained ground on Wednesday while U.S. Treasury yields dipped after reaching multi-year highs as recent surging oil prices stoked inflation worries, setting the scene for the Federal Reserve to project rates staying higher for longer.
The surge in oil prices, which propelled Brent crude futures to 10-month highs, has prompted concerns about inflation. However, the recent fall in sterling’s high inflation rate in August came as a surprise, leading to speculation that the Bank of England could halt its streak of interest rate hikes as soon as Thursday.
While Brent crude futures fell 0.8% and eased off their recent highs, they remain up 30% in the past three months due to reduced output by Saudi Arabia and Russia. These higher energy costs have had a knock-on effect on Canadian inflation, causing the loonie to rise and triggering bond market sell-offs worldwide.
This comes as the Federal Reserve concludes its two-day meeting, with expectations that rates will remain unchanged between 5.25% and 5.5%. The central bank’s policy statement is due at 1800 GMT, followed by a press conference with Fed chief Jerome Powell. The U.S. rate market has been scaling back expectations for rate cuts in 2024, resulting in a lift in short-term U.S. rates.
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In London trade, two-year Treasury yields were down 3.5 basis points at 5.07% after a sharp rise on Tuesday, while benchmark 10-year Treasury yields were last trading at 4.34% after reaching 4.371% overnight.
Waiting on the Fed: Central Bank Meetings and Market Reaction
The Federal Reserve’s meeting is just one among many central bank meetings taking place this week, with policy announcements expected from Sweden, Switzerland, Norway, Britain, and Japan. Despite this, world stock markets have been recording slight gains ahead of the Fed’s rate decision.
European stocks are up by 0.7%, and U.S. equity futures are also rising. However, markets in Asia have seen some volatility, with MSCI’s broadest index of Asia-Pacific shares outside Japan falling 0.5%. This drop is mainly attributed to Hong Kong stocks dragging down the index as China chose not to adjust lending rates. Japan’s Nikkei also fell by 0.7%.
Following the unexpected fall in Britain’s inflation rate, sterling has performed poorly against other major currencies. Currently trading 0.25% lower at $1.2365, UK gilt yields have also fallen sharply as investors reduce bets for a rate hike on Thursday, with two-year yields dropping by over 14 bps to 4.85%.
Analysts from Goldman Sachs ANBLEs, led by Sven Jari Stehn, have noted that two of the three indicators used by the Monetary Policy Committee (MPC) to monitor inflation persistence have shown more progress than anticipated since August. With this in mind, they expect the MPC to leave the Bank Rate unchanged and have lowered their forecast for the terminal policy rate to 5.25%.
Meanwhile, the Japanese yen continues to face pressure, leading to Japan’s top financial diplomat, Masato Kanda, stating that Japanese authorities are in constant communication with their U.S. counterparts and are open to all options if “excessive moves persist.” The yen has consistently weakened against the dollar this year, hitting a 10-month low of 148.17 per dollar.
Although benchmark 10-year Japanese government bonds are at 0.72%, they are inching closer to the Bank of Japan’s adjusted tolerance for yields 1% on either side of zero.
The euro has shown some strength, trading a bit firmer at $1.0704. Commodity exporters’ currencies have also fared well, with the New Zealand dollar holding recent gains at $0.5964 after positive dairy price increases at auction. Similarly, the Australian dollar is holding steady at $0.6486. Analysts suggest that markets may be more sensitive to a dovish surprise from U.S. policymakers, adding that there may be limited upside to two-year and three-year dollar rates unless the Fed significantly deviates from expectations.
Gold prices have been kept in check by rising yields, with spot gold last trading at $1,930 an ounce.
In conclusion, European stocks have seen an uptick while U.S. Treasury yields have dipped, driven by concerns over inflation and oil price volatility. As the Federal Reserve concludes its meeting, speculation remains about the path of interest rates. The outcome of the meeting, along with other central bank meetings taking place this week, is expected to have a significant impact on global markets.
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