Global stocks up slightly as markets await outcome of Federal Reserve meeting

London — World stocks were cautiously higher on Wednesday as hopes that a banking crisis would be averted were tempered by uncertainty ahead of a Federal Reserve (Fed) meeting that will see the central bank caught between taming inflation and maintaining stability.

Data showing that British inflation rose unexpectedly to 10.4% in February boosted expectations for a quarter-point rate hike at Thursday’s Bank of England meeting, lifting sterling.

While London’s FTSE stock index dipped, European stock markets more broadly edged higher, while Asia-Pacific shares outside Japan added 1.3%.

Japan’s Nikkei climbed 2.0%, led by a rebound in beaten-down bank stocks.

Efforts by regulators and policymakers globally to stem banking sector turmoil have helped avoid a rout in equity markets, but the mood remains fragile. S&P 500 futures and Nasdaq futures edged down.

The spotlight was firmly on the Fed, which concludes a two-day meeting later on Wednesday.

It is expected to raise interest rates by a quarter of a percentage point, a decision that will land amid a brewing political storm over the US central bank’s oversight of collapsed Silicon Valley Bank and with the financial world hanging on the words of Fed chief Jerome Powell.

“So far, the banking issues are more idiosyncratic than systemic, and a system breakdown has become far less likely in the wake of the extraordinary deposit support announced by the Fed in the wake of the Silicon Valley Bank collapse,” said Padhraic Garvey, regional head of research, Americas at ING.

“Plus, delivery of a 25bps hike still means the Fed is tightening. There is likely at least another hike to come.”

QT and dot plots

An added complication is whether the Fed temporarily stops selling its holdings of Treasury debt, known as quantitative tightening, and what Fed members do with their dot plot forecasts for future rate hikes.

Having even priced in the risk of a rate cut last week, futures now imply an 86% chance of a quarter-point rise to 4.75%-5.0%. A couple of weeks ago the market had been wagering on a half-point hike.

How Powell navigates all this in his 6.30pm GMT news conference could determine whether markets succumb to fresh selling or stabilise further.

“It’s almost as if we’re seeing Powell flipflop a bit between that slightly less hawkish FOMC [Federal open markert committee] meeting in January-February and then his more hawkish appearance before the Senate,” said Fiona Cincotta, market strategist at Citi Index.

“In that sense, he does need to be a bit careful about how much he does say, because there is a risk, if you're chopping and changing your tune so frequently, of losing credibility with the markets.”

Bond investors will be hoping Powell can instil some calm, given the wild volatility of recent days. Two-year Treasury yields were last down about 6bps on the day at 4.11%, having made a remarkable round trip from 5.085% to 3.635% in just nine sessions.

European bonds have gone along for the ride. German two-year yields overnight recording the biggest daily jump since 2008, as markets went back to pricing in more European Central Bank hikes.

In currency markets, sterling rose 0.6% to $1.2295 after the release of the British inflation data.

The euro meanwhile touched a fresh five-week high at $1.0793 , benefiting from renewed rate-hike bets.

The dollar index was a touch softer, while the dollar was slightly weaker at ¥132.41. 

In commodities, the mild improvement in risk sentiment resulted in gold fade back to $1,943/oz and away from Monday’s top at about  $2,009.

Oil prices eased after an industry report showed US crude inventories rose unexpectedly last week, in a sign that fuel demand may be weakening.

Brent dipped 46c to $74.88 a barrel, while US crude fell 48c to $69.19.

Reuters