LONDON—European shares dipped and U.S. stock futures were mixed on Wednesday as a note of caution crept into world stock markets as the U.S. Federal Reserve looked set to deliver its fourth, 75 basis points interest rate increase.
Another aggressive rate hike to contain hot inflation when the Fed concludes its two-day meeting later is anticipated. For markets, the key question is whether the Fed will also signal it could slow additional rate hikes, in a so-called dovish pivot.
“The extreme sensitivity of global assets and the dollar to the theme of a dovish pivot has boosted the notion this will be a make-or-break event for market sentiment,” said ING currency strategist Francesco Pesole.
European stock markets opened higher, but moved lower as the day wore on. The broad STOXX 600 index dipped into negative territory and benchmark indexes in London, Paris, and Frankfurt were either lower or flat on the day.
U.S. stock futures, which provide an indication of how Wall Street will open, also lost some of their strength and were mixed.
With a 75 basis points (bps) increase in the Fed’s key rate on Wednesday to a range of 3.75 percent to 4.00 percent priced in, traders are split on the size of a December move and futures market price in a roughly a 40 percent chance of another 75-bps increase.
Data on Tuesday showing a jump in U.S. monthly job openings supported the case for the Fed to remain hawkish.
Analysts said uncertainty over how economic data would pan out meant a dovish pivot could still be some way off, leaving risk assets such as stocks vulnerable and the dollar supported.
“We suspect (Fed) Chair (Jerome) Powell will try very hard to avoid saying anything that might be misconstrued as a signal that the inevitable step down in the size of tightening is a pivot toward the end of the tightening cycle,” said Kevin Cummins, chief U.S. economist at NatWest Markets.
“Given that the inflation-related data have yet to show any signs of any moderation, we lean a bit more toward officials holding off from signalling they are reducing the size of hikes just yet.”
Cummins expects the Fed to step down to a 50 bps hike in December.
In Asia, share markets outside Japan rose to a two-week high.
Upbeat remarks by Chinese regulators about policy support and rising expectations among investors about easing of strict COVID-19 measures boosted sentiment. Chinese bluechips and Hong Kong stocks gained 1.2 percent and 2.4 percent respectively.
Japan’s Nikkei stock index closed flat, holding close to its highest levels since September.
In currency markets, the dollar eased 0.22 percent against a basket of major currencies. It fell 0.75 percent against the Japanese yen to 147.11 yen amid fears of intervention from authorities and thin liquidity.
Bank of Japan Governor Haruhiko Kuroda said on Wednesday a tweak to the central bank’s yield curve control policy, which has contributed to the weakness in the yen, could become a future option.
The robust dollar retreated in October on speculation the Fed might indicate a slowdown in its aggressive tightening campaign.
A Reuters poll found currency strategists thought the dollar’s retreat was temporary.
U.S. Treasury yields were largely steady on Wednesday after reversing much of Tuesday’s sharp rise on the unexpected strength in the jobs data.
Ten-year Treasury yields hovered around 4.04 percent while two-year yields eased just 1.5 bps to 4.50 percent.
Oil prices were a touch firmer as market participants eyed falling U.S. crude stockpiles and upcoming European sanctions on Russian barrels.
Brent crude futures were last up 0.13 percent at $94.75, U.S. crude oil futures rose 0.1 percent to $89.49 per barrel.
Gold was slightly higher, with spot price trading at $1,655 per ounce.
