European shares fall ahead of the Fed’s interest rate decision
European stocks fell in early trading on Wednesday as investors awaited the Federal Reserve’s interest rate decision, in which the US central bank is expected to raise interest rates again to fight inflation.
The regional Stoxx 600 and the German Dax both fell by 0.1 percent, while the Paris Cac 40 fell by 0.4 percent. London’s FTSE 100 lost 0.3 percent after fresh UK inflation data bolstered market expectations that the Bank of England will raise its key interest rate on Thursday.
The Asian stock markets moved forward, the Hang Seng index in Hong Kong gained 1.7 percent, and the Kospi in South Korea gained 1.2 percent. Japan’s Topix jumped 1.7 percent after markets reopened following a one-day break for the spring equinox holiday.
The Euro Stoxx Banks index fell 0.7 percent, closing with a 3.8 percent increase in the previous session. The Hang Seng Finance index rose by 1.7 percent and the Topix Banks index by 2.2 percent.
Investors are waiting for the Fed’s interest rate decision later. Futures markets indicate that traders expect an increase of 0.25 percentage points to 4.75 percent from the current 4.5 percent.
Expectations that interest rates will remain high for an extended period have receded in recent weeks, as traders bet that the turmoil in the banking sector over the collapse of Silicon Valley Bank and the acquisition of rival Credit Suisse will force the Fed to ease. its tightening cycle.
“There is a lot of uncertainty as to whether the Fed can tighten and at the same time try to ease the stress on regional banks, among others (more liquidity support),” said SEB Research analysts.
The Fed also publishes revised projections for the path of monetary policy through 2025, as well as forecasts for growth, unemployment and inflation. The US central bank last published its official estimates in December, when most believed the federal funds rate would peak at 5-5.25 percent.
The US Treasury strengthened to a lesser extent, the yield of the two-year bond, which is sensitive to interest rate expectations, fell by 0.03 percentage points to 4.14 percent. The yield on the 10-year bond decreased by 0.02 percentage points to 3.59 percent. Yields vary inversely with price.
However, investors have started to price in a further interest rate hike by the Bank of England at its meeting on Thursday. UK inflation unexpectedly jumped to 10.4 percent in February, 50 basis points above expectations and increasing pressure on the central bank to raise interest rates again.
Swap market pricing indicates that investors are betting on a 25 bp hike.
Sterling gained 0.5 percent against the dollar, near a two-month high, while the 10-year gold yield rose 0.1 percentage point to 3.47 percent. British two-year-old gilts rose by 0.18 percentage points to 3.7 percent.
The European Central Bank decided on a 50 basis point increase last week, and President Christine Lagarde promised simultaneous support for the banking sector.
“I think the BoE has the same choice as the European Central Bank last week and the Fed tonight,” said Neil Birrell, chief investment officer at Premier Miton. “The equation is raising interest rates to fight inflation, but not crushing the economy and making sure the financial system remains sound – that makes everything difficult.”
Efforts to contain contagion in the financial system, including U.S. Treasury Secretary Janet Yellen’s proposal that the government step in to repay all deposits with the nation’s smaller lenders, helped calm nerves on Tuesday.
KBW Bank’s index finished with a plus of 5 percent. The blue-chip S&P 500 rose 1.3 percent and the tech-heavy Nasdaq Composite rose 1.6 percent.
Oil prices fell, with West Texas Intermediate, the US benchmark, slipping 0.7 percent to $69.21 a barrel, snapping a two-day advance of nearly 4 percent. International benchmark Brent crude fell 0.5 percent to $74.91.