Markets stutter on eve of Fed rate call

Global stock markets faltered yesterday with investors nervous on the eve of the US Federal Reserve’s latest interest rate decision. London and Paris held firm but Frankfurt flatlined, after a broadly downbeat session in Asia and despite surging Tokyo stocks.

Equities had rallied Monday as investors turned their attention to macro issues, particularly the Fed’s policy meeting, and US President Donald Trump’s maiden speech to the UN General Assembly.

All eyes are now on the US central bank, whose two-day gathering kicked off later yesterday, amid global moves towards tighter monetary policy. While the Fed is not expected to raise interest rates, remarks from the Fed and its boss Janet Yellen will be pored over for clues about future moves-with talk of another rise-and plans to wind down the vast bond-buying stimulus put in place during the financial crisis.

“I suspect they are not going to raise rates quite yet; I suspect they will guide towards December,” said David Hussey, head of international core equities at Manulife Asset Management. “The US economy is in reasonably good health at the moment. It’s doing okay. “Unemployment is very low and the weak dollar is probably going to boost a bit of inflation so she (Yellen) will probably be raising rates again early next year.”

‘Incredibly low rates’

With global economic growth improving, major central banks around the world are mulling moves to tighten monetary policy. That has sparked investor jitters over the impact of higher borrowing costs on consumers, businesses and financial markets.

“There’s no reason not to start normalizing policy. People are obsessing about this,” Hussey told AFP. “The big picture is that we are at incredibly low rates and they have to start slowly moving back up to some sort of normal neutral level, which is probably some way higher than they are at the moment. “So ... people see it coming and therefore they are nervous. It’s as simple as that.” The Fed is also expected this week to announce the start of a plan to gradually reduce the multi-trillion dollar investment holdings built up to support the economy in the wake of the 2008 financial crisis.

European shares opened slightly lower yesterday as traders awaited clues from a Federal Reserve meeting on its plans to move towards unwinding its $4.2-trillion portfolio of Treasuries and mortgage-backed securities. Despite Wall Street reaching new highs yet again, shares in Europe followed Asia’s overnight caution with the pan-European STOXX index down 0.2 percent, but still in range of six-week highs.

“As the FOMC (Federal Open Market Committee) convenes and starts its two-day meeting, markets will probably remain somewhat muted - awaiting tomorrow’s (Wednesday’s) decision”, Rabobank’s analysts said in a morning note.

Financials were trading in positive territory, as monetary tightening typically benefits lenders. The European banking index was up 0.1 percent with HSBC at the top of the list with a 1-percent rise.

Most sectors posted very limited losses or gains. “The prospect of the Fed meeting is triggering little worries as the market has already digested the idea that the reduction of the balance sheet will be done on homeopathic dosage, thereby limiting negative impacts on stocks”, wrote Saxo Bank’s economist Christopher Dembik, noting that geopolitical concerns were also easing off. A steady flow of corporate news fueled strong price swings on a number of stocks. British online grocer Ocado topped Europe’s losers list with a 5.5-percent fall after the firm reported third-quarter results, saying short-term costs could increase due to investment in a new distribution center. Heineken retreated 4.5 percent after Fomento Economico Mexicano (Femsa) sold a 5.24-percent stake in the world’s second largest brewer for about 2.5 billion euros ($3 billion). Morgan Stanley cut its rating for Hugo Boss to underweight, prompting a 3.8-percent fall for the German fashion group.

On the M&A front, Eurofins got a boost from the acquisition of EAG Laboratories in North America and rose 4.1 percent. Shares in Solvay didn’t benefit from the announcement of the sale of its polyamides business to BASF for 1.6 billion euros. The Belgian company lost 1.1 percent while Germany BASF was 0.1 percent down.

Shares in Solvay, which bought France’s Rhodia for 3.4 billion in 2011, remain however close to their 2015 highs of 132 euros per share. Clariant edged up 0.3 percent as news emerged the hedge funds fighting the Swiss chemical firm’s planned $20 billion merger with Huntsman Corp built a 15.1 percent stake. ‘Trump trade’ World stocks had bounced higher Monday on optimism that Trump can push through the market-friendly policies that helped propel a global rally at the start of the year. After the selling earlier this month fuelled by North Korea’s nuclear test, Wall Street rebounded Monday to more record peaks.

“The surge was yet another testament that the reinvigoration of the Trump trades is gaining traction,” said Greg McKenna, chief market strategist at AxiTrader. Japanese dealers returned from a three-day weekend yesterday and sent Tokyo stocks two percent higher with exporters buoyed by the dollar’s push towards 112 yen. The weak yen boosts Japan’s exporters. However, elsewhere in Asia, markets turned lower as traders cashed out. —Agencies