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European stocks mixed ahead of Federal Reserve's interest rate decision

Suban Abdulla
·4-min read
Chairman of the US Federal Reserve Jerome Powell. Photo: Al Drago-Pool/Getty Images
Chairman of the US Federal Reserve Jerome Powell. Photo: Al Drago-Pool/Getty Images

European stock markets were mixed on Wednesday as investors await the Federal Reserve's announcement of new economic and interest rate forecasts on Wednesday.

Britain’s FTSE 100 (^FTSE), which has been trading in the red for most of the day, fell 0.5%. France’s CAC (^FCHI) closed flat and Germany’s DAX (^GDAXI) made some gains edging 0.2% higher.

It came amid fears over the pace of the continent’s COVID-19 vaccine rollout and rising cases in Germany. Several nations, including France, Germany, Spain, Italy and Sweden halted AstraZeneca (AZN.L) jabs as a precaution following reports of blood clotting in some patients.

European Commission president Ursula von der Leyen warned on Wednesday that the bloc is ready to introduce emergency control on the COVID vaccine production and distribution, if required to cope with the "crisis of the century."

She said "all options are on the table" to boost the EU’s slow inoculation programme, including moves to halt exports to nations which "have higher vaccination rates" than the EU — including the UK.

Meanwhile, sterling soared to a 12-month high against the euro as the prospects of COVID-19 vaccine passports and a post-lockdown holiday boom boost optimism in the travel industry and for travellers.

After a poor start to the week, which saw sterling fall 0.65% against euro (GBEUR=X) and 0.5% against the dollar (GBPUSD=X), it made up some ground against the euro, passing the 1.17 mark on Wednesday morning.

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In the US, the Federal Open Market Committee (FOMC) kicked off its two-day policy meeting on Tuesday and chair Jerome Powell is expected to make concluding remarks later on Wednesday that could indicate whether the US central bank will tweak its interest rates outlook.

Experts think the interest rates dot plot could steepen — the Fed's guidance for how they see expect to raise rates in future. According to a survey by Macrodesiac, 77% expect interest rates to go up before 2023, while 35% think it will happen before 2022 comes to a close.

Russ Mould, investment director at AJ Bell said: “It was all quiet on the Western and Eastern front with markets across Europe and Asia barely moving on Wednesday."

“The Fed seems content to keep monetary policy ultra-loose in its attempts to let the economy run hot as it recovers from the effects of the pandemic. Fixed-income markets have become a little more nervous, but equity markets seem happy about it so far.

“Markets will therefore want to know what any upgrades to US economic expectations mean for monetary policy and when interest rates might go up. Policy changes aren’t expected at this meeting, but the Fed’s comments will be closely watched for any clues as to what it might do over the next two years."

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Focus will also be on any hint of the Fed paring back its bond buying programme and how it approaches the recent rise in government bond yields.

Powell has been lax so far about the upward march of bond yields saying it’s a natural outcome accelerated by optimism over the possibility of a strong economic rebound as the US economy reopens and the $1.9tn stimulus president Joe Biden signed last week.

"So far market players are betting on one thing, and that is the promise which the chairman of the Federal Reserve has made — keeping the monetary policy unchanged. Speculators believe that there is sufficient recovery in the US, and there is no need for aggressive dovish monetary to remain in place. But time will only tell what the Fed thinks about this," chief market analyst at AvaTrade Naeem Aslam said.

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Since the last FOMC meeting in January, the yield on the 10-year US Treasury – a proxy for longer term interest rates – has surged over 60 basis points. There have been predictions that it could move towards 1.8% over the coming weeks amid hopes of an economic recovery.

The yield on the benchmark Treasury note hovered near the highest levels in over a year to 1.62% on Tuesday, after a 20-year bond auction drew strong demand.

Across the pond, S&P 500 (^GSPC) declined 0.5%, Dow Jones (^DJI) was up 0.3% and the tech-heavy Nasdaq (^IXIC) fell 1.4% as Wall Street awaits Fed's decision.

It comes after disappointing February retail sales figures released on Tuesday showed a 3% drop, while industrial production for the same month fell 2.2% after a 1.1% rise in January.

Stocks in Asia closed flat overnight as markets gauged the risk of a potential shift in the Fed’s dovish policy forecast. Japan’s Nikkei (^N225) fell 0.02% the Hang Seng in Hong Kong (^HSI) declined 0.04% and China’s SSE Composite index (000001.SS) closed 0.03% down.

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