Equities struggle while dollar gains ahead of Fed announcement
London — European stock markets retreated from 20-month highs and the dollar inched up on Wednesday as investors pondered the chances of another rise in US interest rates in June ahead of the Federal Reserve’s May statement.
Since December, the US central bank has finally begun to deliver on the long-disappointed expectation of a steady rise in borrowing costs and an increase in official rates in June is now almost 60% priced in by markets.
But US economic numbers in the past month have been less convincing, and the latest gains for global share prices look as much the product of an improving recovery in Europe as the US-based optimism that dominated the end of 2016.
A surprise fall in iPhone sales in the first quarter and drops in vehicle sales for Ford and General Motors added to nerves about the durability of US growth in the absence of a boost from tax cuts or new public spending.
Falls in the price of copper, iron ore and other metals also underlined growing nerves over China and, with oil prices stuck near recent lows, weighed on Europe’s commodity-heavy indices.
"These numbers point to US consumers becoming more cautious and do seem like a source of some of the weakness today," said Andy Sullivan, a portfolio manager with GL Asset Management UK in London. "Autos, tech and basic resources are leading Europe lower."
By 8.45am GMT, the Stoxx 600 index of leading European shares was down 0.2%. France’s CAC 40 and Germany’s DAX fell 0.35 and 0.2% respectively while the resource-heavy FTSE 100 dipped 0.3%. After a mixed Asian session, with a number of major markets closed, the MSCI global share index was marginally lower on the day.
A surge in business investment and the fastest wage growth in a decade suggest US activity will regain momentum as the year progresses.
But Satoshi Okagawa, senior global markets analyst for Sumitomo Mitsui Banking Corporation in Singapore, said the weak US car sales could make market participants wary of actively buying the dollar against the yen for now.
"Concerns about geopolitical risks such as North Korea had weighed on the dollar against the yen recently.... But the focus is shifting to whether the [strength] of US economic fundamentals is for real," he said.
"There is more data coming up, including the [US nonfarm payrolls] data [due out on Friday], so those need to be watched closely," Okagawa said.
The dollar index, which tracks the greenback against a basket of trade-weighted peers, rose 0.1% to 99.055.
It gained about 0.2% against the yen and 0.1% against the euro on the day but remained below highs hit over the past week.