Anticipating Fed Meeting, European Shares Surge – Boosting Trader Sentiment

Receive free Capital markets updates

We’ll send you a myFT Daily Digest email rounding up the latest Capital markets news every morning.

European stocks and Wall Street futures were higher on Wednesday, hours before the Federal Reserve is widely expected to leave its policy rate unchanged and deliver its latest set of short-term interest rate projections.

The region-wide Stoxx Europe 600 added 0.3% in early trade. London’s FTSE 100 jumped 0.6% after UK inflation fell to 6.7% in August from 6.8% in July, surprising economists ahead of the Bank of England’s crucial rate-setting announcement on Thursday.

Property developers were the main beneficiaries: Taylor Wimpey and Persimmon rose 5% and 4.7%, while British Land rose 4.6%. Sterling dropped 0.4% against the dollar to $1.2339 in early morning trade, its lowest level since May.

In the US, contracts tracking Wall Street’s benchmark S&P 500 and the tech-heavy Nasdaq 100 both rose 0.1% as investors awaited the Fed’s latest monetary policy announcement.

Markets are pricing in a 99% chance that rates remain unchanged on Wednesday, according to data compiled by Refinitiv and based on interest rate derivatives prices.

Since the Fed’s last meeting in July, core inflation has fallen from 4.8% to 4.3%, non-farm payroll growth has moderated, and the unemployment rate has nudged up to 3.8%.

For investors, the main question is whether the Fed, led by chair Jay Powell, will be open to one more increase before policy shifts to cutting rates.

“We think the communication that ‘additional policy firming may be appropriate’ will probably be retained verbatim as the July meeting minutes confirmed that ‘most participants continued to see significant upside risks to inflation’,” said analysts at JPMorgan.

Liz Ann Sonders, chief investment strategist at Charles Schwab, said she expected Powell “will leave the door open for additional hikes as he’s done in the past, reinforcing the idea that the Fed wants to take its time to assess whether, if disinflation continues, it’s likely to stick”.

“The lesson Powell’s taken most earnestly from the 1970s experience is that declaring victory and easing policy only to see the inflation genie re-emerge from the lamp meant [former Fed board chair Paul Volcker] had to re-raise rates,” Sonders said.

Comparisons with the 1970s — when successive oil price shocks led to a second wave of inflation — have taken on fresh meaning as the price of Brent crude has climbed 30% over the past two months to about $95 a barrel, its highest point this year.

US yields dipped on Wednesday having hit a 16-year high in the previous session. The benchmark 10-year Treasury yield fell 0.01 percentage points to 4.35% after reaching its highest level since November 2007 on Tuesday. Yields move inversely to price.

Asian stocks declined, with China’s CSI 300 down 0.4%, Japan’s Topix falling 1%, and Hong Kong’s Hang Seng index losing 0.5%.