Wall Street equity futures and European shares rallied on Wednesday, as markets remained volatile ahead of the outcome of the Federal Reserve’s latest monetary policy meeting.
Futures contracts that wager on the direction of the blue-chip US S&P 500 index rose 1.5 per cent. Those tracking the technology-focused Nasdaq 100 added 2.1 per cent, with upbeat financial forecasts from tech group Microsoft also helping to boost sentiment.
Europe’s regional Stoxx 600 index rose 2.1 per cent, building on an increase from the previous day, while the UK’s FTSE 100 rose 1.8 per cent.
The gains followed a series of sharp swings for global equity markets as investors grappled with predictions of the US central bank embarking on its first rate rise cycle since 2018 to battle soaring inflation. The S&P 500 has dropped almost 9 per cent this month.
The Fed finishes its latest meeting on Wednesday and is widely expected to signal plans for an interest rate rise in March. That would mark two years since the central bank pulled its main funds rate down to almost zero to counter the economic shocks of the pandemic.
But Wednesday’s equity rally suggested some traders now expected the Fed to “soothe fears of an aggressive tightening cycle”, said Investec strategist Roger Lee.
“Interest rates have been declining since 2019 so the market is having to adjust to a completely new environment and that inevitably is going to be very complicated and difficult.
“But it’s hard today to think the Fed will be more hawkish than some of the hawks in the market are fearing.”
Earlier this month, JPMorgan chief executive Jamie Dimon said there was a “pretty good chance” of more than four rate rises this year, which have already been priced in to futures markets, with the possibility of six or seven.
Higher rates not only cast a pall over companies’ ability to borrow and invest. They also reduce the present value of companies’ expected future earnings in investors’ valuation models, with speculative technology stocks having proved especially vulnerable to the spectre of tighter monetary policy. Wall Street’s tech-heavy Nasdaq Composite share index closed on Tuesday about 16 per cent below the all-time high it reached in November.
The annual pace of US consumer price inflation reached an almost 40-year high of 7 per cent last month, with price rises broadening out from areas hit by pandemic-related supply chain bottlenecks into most categories, including food and rent. Unemployment has fallen to almost pre-pandemic levels. Labour shortages and record job openings have also spurred wage growth.
“They have to act,” said Anne Beaudu, co-head of global bond markets at fund manager Amundi. But widespread speculation that had built up this week about the Fed signalling a half a percentage point rate rise in March was misplaced, she added.
“We don’t think they will want to shock the market at the start of the process.”
US Treasury markets were steady as bond investors waited for an update from the Fed on its future purchasing plans. The yield on the benchmark 10-year Treasury note, which has climbed from about 1.5 per cent at the end of last year, was flat at 1.79 per cent.
Asian stocks were also volatile on Wednesday. China’s CSI 300 index skirted a technical bear market before closing 0.7 per cent higher. In Tokyo, the Nikkei 225 slipped 0.4 per cent.
