European stock markets muted as investors wait for Fed's rate call

·4-min read
Stock markets U.S. Federal Reserve Chairman Jerome Powell testifies during the Senate Banking Committee hearing titled
The focus of global stock markets is on US Federal Reserve chairman Jerome Powell ahead of the biggest hike in US interest rates in over two decades. Photo:Tom Williams/Reuters

European stock markets are treading water as investors brace for a US interest rate rise when the Federal Reserve meets later today.

The FTSE 100 (^FTSE) dipped marginally 0.5% to 7,516.65 during midday trading, while the CAC (^FCHI) shed 0.4% in Paris. In Germany, the DAX (^GDAXI) was flat.

UK investors also have the prospect of a rate rise from the Bank of England tomorrow, with the consensus being that the central bank will raise the interest rate to 1%.

Across the pond, US stocks inched higher shortly after the opening bell. The Dow Jones Industrial Average (^DJI) rose or 0.3%, at the open to 33,240.78.

The S&P 500 (^GSPC) advanced 0.12% to 4,180.56, while the Nasdaq Composite (^IXIC) dropped 0.2% to 12,536.53.

The London benchmark was dragged down by mining stocks. Rio Tinto (RIO.L) lost 2.2% and Anglo American (AAL.L) fell 1.3% after being downgraded by brokers at Liberum. Glencore (GLNCY) also lost ground, but recovered in the afternoon, gaining 0.7%.

Read more: Bank of England set to hike interest rates to 1% to rein in inflation

HSBC (HSBA.L) gained 1.1%, after it kicked off its planned $1bn share buyback.

Flutter (FLTR.L)  jumped to the top of the FTSE 100 despite revealing a £30m hit from safer gambling laws and a slowdown in online betting revenues.

Online fashion retailer Boohoo (BOO.L) dropped 14%, as it reported a 28% fall in annual core earnings that reflected significant freight and logistics cost inflation and warned that pandemic-related external factors would continue to impact it this year.

Still, traders are mostly keeping to the sidelines ahead of the US Federal Reserve’s rate decision. The central bank is expected to hike rates by 50 basis points for the first time since the year 2000.

CMC Markets analyst Michael Hewson, in a note, said that a 50 basis point rate rise today would be of no surprise to most in the market, taking the Fed interest rate to 1%.

“This is the least of market expectations, when it comes to what the Fed may well announce today, with an outside chance we might get some members push for a 75bps hike,” the analyst said in a note. “The biggest question will be around the pace of its balance sheet reduction program along with the pace of subsequent rate hikes, with the potential for another 50bps hike to come in June,”

He added: “Powell’s comments at the IMF, that the Fed could well go much harder, and a lot quicker on rate hikes has prompted concern that the Fed may well overplay its hand at a time when the global economy looks set for a sustained slowdown, as China continues to lose its battle with COVID.”

AJ Bell Investment Director Russ Mould said the US Federal Reserve’s determination to continue tightening monetary policy, via both higher interest rates and sterilisation of quantitative easing, is likely to make life more difficult for investors.

“Given that benchmark 10-year US Treasury yields are still running well below the prevailing rate of inflation, at 3.0% plays 8.5%, the bond market seems to be that the US economy is strong enough to withstand a gradual tightening of policy – and that even if it isn’t, the Fed will chicken out and quickly ease again. Yet wobbles in headline indices – and routs in previously hot areas of the market like new floats, SPAC deals and technology shares – suggest that stock market investors area not quite so sure for two reasons.

“First, the tune from the Powell-led Fed appears to be changing dramatically, with inflation the key issues and little apparent heed being paid to employment, financial market conditions or the soaring US dollar.

“Second, history suggests that even if the US economy can withstand a higher cost of money, financial markets may not, as improved returns on risk-free cash (at least in nominal, pre-inflation terms) dampen the relative appeal of financial assets such as bonds and shares, where the risks are higher, especially if a bull run leaves valuations looking extended relative to historic norms."

Read more: Bumper pay growth in finance fuels earnings inequality in UK

Negative signs from Asia as Hong Kong's Hang Seng (^HSI) fell 1.1%. The Nikkei 225 (^N225) in Tokyo and the Shanghai Composite (000001.SS) are closed for a holiday.

Meanwhile, oil prices pushed higher as the EU outlined plans to phased out imports of Russian crude over the next six months. Brent crude (BZ=F) was trading at $108 a barrel this Wednesday morning.

The ban will cover all Russian oil, seaborne and pipeline, crude and refined, European commission president Ursula von der Leyen said on Wednesday.

She vowed to phase out the supplies in an “orderly fashion”, hitting crude oil within six months and refined products by the end of the year.

Watch: How does inflation affect interest rates?