European stocks wavered on Monday ahead of a crucial interest rate decision this week from the US central bank as it battles to tame inflation.
The regional Stoxx Europe 600 share index traded up 0.2 per cent after drifting between small gains and losses. The UK’s FTSE 100 traded flat.
Futures trading signalled Wall Street’s S&P 500 and Nasdaq 100 share indices would rise about 0.5 per cent each at the New York open, recouping some losses from a downbeat session on Friday driven by pessimistic business surveys.
The Fed is widely expected to raise its main interest rate by 0.75 percentage points for the second consecutive month this week, which would increase the funds rate to a range of 2.25 per cent to 2.5 per cent.
After deep falls for global stocks this year, market sentiment is now swinging between fears of rate rises hastening an economic downturn and optimism about weaker demand cooling red-hot inflation.
“Bad news can be good news in very macro-driven markets and sentiment has become incredibly fickle,” said Neil Birrell, chief investment officer at Premier Miton Investors.
The annual rate of US inflation rose to 9.1 per cent last month and the jobs market in the world’s largest economy remains strong, with employers hiring a higher-than-expected 372,000 new workers last month. But signs of a housing market slowdown and a consumer spending decline have started to emerge.
Tim Graf, head of Emea macro strategy at State Street, said lagging indicators that the Fed closely follows suggested the US economy was running hot, but that forward-looking data pointed to a slowdown.
“There’s this thesis of a shallow recession now that brings inflation lower,” he said. But he warned of a “deeper and longer slowdown” if the Fed continues raising aggressively after this month.
Wall Street’s S&P 500 equity gauge closed 0.9 per cent lower on Friday, taking its year-to-date fall to 17 per cent after a purchasing managers’ index produced by S&P Global showed US business activity contracting for the first time since June 2020.
A business climate index produced by Germany’s Ifo institute fell to a lower-than-expected reading of 88.6 on Monday, from a downwardly revised 92.2 in June, underscoring fears of a eurozone recession.
The euro traded steadily against the dollar, buying $1.02.
German government bonds softened after a rally at the end of last week as traders sought out low-risk assets to shelter from economic uncertainty.
The yield on Germany’s 10-year bond, a barometer for debt costs in the eurozone, added 0.03 percentage points to 1 per cent as the price of the debt fell.
Italy’s equivalent debt yield was steady at 3.42 per cent, although the premium that investors demand to lend to Italy over Germany, a gauge of financial stress closely watched by the ECB, remained at an elevated 2.37 percentage points.
The European Central Bank raised its main interest rate last week for the first time in 11 years, while the resignation of Italy’s prime minister Mario Draghi also heightened stress in the nation’s debt markets.
In Asia, Hong Kong’s Hang Seng share index edged 0.2 per cent lower and Japan’s Nikkei 225 lost 0.8 per cent.
