European shares stumble as investors focus on earnings and Fed

London — World shares held just under record highs while European indices edged lower on Tuesday, as investors focused on earnings and the US Federal Reserve’s two-day meeting which ends on Wednesday.

Though Wall Street hit new highs on Monday, sentiment became more mixed during the Asian session, with equities and bonds of Chinese property developers down due to concern about spreading financial contagion from the China Evergrande Group’s debt crisis.

A debt exchange from one of the country’s top homebuilders triggered a flurry of credit warnings.

At 9.05am GMT, the MSCI world equity index, which tracks shares in 50 countries, was down 0.1%, having come close to the all-time high reached in September.

European indices were mostly in the red, with the Stoxx 600 down 0.2%, having been knocked off the previous session’s all-time high.

Matthias Scheiber, global head of portfolio management at Allspring Global Investments, said he expected European and US shares to pick up during the session as more company earnings are released.

“There are probably more worries in earnings about inflation and margin pressure, rather than systematic impact from the Chinese property market ... we have not seen any negative spillover back into other sectors,” he said.

The Reserve Bank of Australia (RBA) took a major step towards unwinding its pandemic-induced stimulus measures by dropping its target for bond yields, and said that a rate move in 2023 was now possible given that inflation had risen more quickly than forecasted. But it also pushed back against hawkish market expectations.

Short-dated Australian government bond yields fell and the Australian dollar was down 0.7% at $0.74695 at 9.12am GMT.

The Kiwi dollar was also down, while the US dollar index was steady at 93.938.

“Our view is still that ... like the Federal Reserve or the ECB [European Central Bank], to a certain extent [the RBA] will be willing to look through those short-term high inflation numbers,” Scheiber said.

Fed policymakers are expected to approve plans for scaling back their $120bn in monthly bond purchases that would phase them out completely by the middle of next year — a first step away from the core policies put in place in early 2021 to battle the economic fallout from the coronavirus pandemic.

On Monday, Goldman Sachs brought its forecast for the first post-pandemic US interest rate hike forward by a year to July 2022, as the investment bank expects inflation to remain elevated.

The US 10-year Treasury yield was lower on the day, at 1.5523%.

European government bond yields also fell, pausing from the sell-off which was sparked by the ECB last week disappointing expectations of a firm push back against aggressive market pricing for rate hikes.

Reuters