European equities edged lower in early trade on Wednesday as investors looked ahead to the Federal Reserve’s decision on interest rates, in which the US central bank is expected to raise rates again to keep up the fight against inflation.
The region-wide Stoxx 600 and Germany’s Dax both fell 0.1 per cent while the Cac 40 in Paris was 0.4 per cent lower. London’s FTSE 100 lost 0.3 per cent after fresh inflation data in Britain bolstered market expectations that the Bank of England would increase its benchmark interest rate on Thursday.
Asian stocks advanced, with Hong Kong’s Hang Seng index adding 1.7 per cent and South Korea’s Kospi rising 1.2 per cent. Japan’s Topix jumped 1.7 per cent after markets reopened following a one-day break for the vernal equinox holiday.
The Euro Stoxx Banks index fell 0.7 per cent, having closed up 3.8 per cent in the previous session. The Hang Seng Finance index and Topix Banks index were up 1.7 per cent and 2.2 per cent respectively.
Investors are looking ahead to a rate decision from the Fed later in the day. Futures markets indicate traders are expecting an increase of 0.25 percentage points from the current range of 4.5 per cent to 4.75 per cent.
Expectations that interest rates would stay elevated for an extended period of time have declined in recent weeks, as traders bet that turmoil in the banking sector triggered by the collapse of Silicon Valley Bank and UBS’s takeover of rival Credit Suisse would force the Fed to ease off its tightening cycle.
“There are great uncertainties as to whether the Fed can both tighten and simultaneously try to ease the stress for, among other things, the regional banks (more liquidity support),” said analysts at SEB Research.
The Fed will also publish revised projections about the path forward for monetary policy to 2025, as well as forecasts for growth, unemployment and inflation. The US central bank last published officials’ estimates in December, when most thought the federal funds rate would peak at 5 per cent to 5.25 per cent.
US Treasuries made minor gains, with the yield on the two-year note, which is sensitive to interest rate expectations, falling 0.03 percentage points to 4.14 per cent. The yield on the 10-year note dropped 0.02 percentage points to 3.59 per cent. Yields move inversely to price.
However investors began to price in the prospect of further rate rises from the Bank of England, which meets on Thursday. UK inflation unexpectedly jumped to 10.4 per cent in February, 50 basis points above expectations and adding to pressure on the central bank to raise interest rates again.
Pricing from swaps markets indicates investors are betting on a 25bp increase.
Sterling rose 0.5 per cent against the dollar, approaching a two-month high while the yield on the 10-year gilt rose 0.1 percentage points to 3.47 per cent. Two-year UK gilts rose 0.18 percentage points to 3.7 per cent.
The European Central Bank last week opted for a 50bp increase, with president Christine Lagarde promising simultaneous support for the banking sector.
“I think the BoE have got the same choice that the European Central Bank had last week and the Fed have tonight,” said Neil Birrell, chief investment officer for Premier Miton. “The equation is raising rates to beat inflation, but not squash the economy and make sure the financial system remains robust — that makes everything more difficult.”
Efforts to curb contagion in the financial system, including a suggestion from US Treasury secretary Janet Yellen that the government could step in to back all deposits at the country’s smaller lenders, helped assuage nerves on Tuesday.
The KBW Bank index finished up 5 per cent. The blue-chip S&P 500 index added 1.3 per cent and the tech-heavy Nasdaq Composite climbed 1.6 per cent.
Oil prices fell, with West Texas Intermediate, the US marker, slipping 0.7 per cent to trade at $69.21 a barrel, breaking a two-day advance of nearly 4 per cent. Brent crude, the international benchmark, lost 0.5 per cent to $74.91.