European equities held near record highs and bond markets were steady as traders awaited a decision from the US central bank about how quickly it would scale back its substantial pandemic-era monetary stimulus.
The Stoxx Europe 600 share index opened flat, after hitting all-time highs earlier in the week as investors cheered earnings updates that signalled large companies were managing inflationary pressures. London’s FTSE 100 drifted 0.1 per cent lower.
Futures markets tracking the US’s broad-based S&P 500 dipped 0.1 per cent lower after the share index closed at record highs for the four previous sessions.
Headline inflation in the US is running at more than 5 per cent, while improvements in the world’s largest economy from the shocks of 2020 are expected to prompt the Federal Reserve to declare it can now shrink its crisis-era spending that has lowered borrowing costs since March last year.
Tapering
Government bond markets have whipsawed in the past two weeks as traders speculated about how quickly the central bank planned to reduce its monthly purchases of $120 billionn (€103 billion) of Treasury notes and mortgage-backed securities, and whether the so-called tapering would be a precursor to interest rate rises next year.
“Investors are using the bond markets to play out their central bank forecasts,” said Rebecca Chesworth, senior strategist at State Street’s SPDR exchange traded fund unit. “But equity markets have got that calming factor of good earnings coming through.”
Companies listed on the MSCI World index of leading shares have beaten analysts’ forecasts by 10 per cent on average during this third-quarter earnings season, according to Bloomberg data.
Still, “earnings season has been great but it is backward looking,” cautioned Beata Manthey, equity strategist at Citi. “The combination of prospective interest rate rises and high valuations is making us nervous,” she added, particularly because a slowdown in China’s economy “does not feel evident in stock markets yet”.
The yield on the US’s benchmark 10-year Treasury note, which moves inversely to the price of the debt, dropped 0.03 percentage points to 1.52 per cent. This key debt yield, which underpins government, business and household borrowing costs worldwide, has climbed from about 0.9 per cent at the start of the year.
Germany’s 10-year Bund yield, which rose as high as minus 0.07 per cent on Monday, ticked 0.02 percentage points lower to minus 0.184 per cent.
Decision
The Bank of England releases its latest monetary policy decision on Thursday, after governor Andrew Bailey last month said policymakers would “have to act” against surging energy prices and above-target inflation.
The UK’s 10-year gilt yield, which acts as a benchmark for borrowing costs in Britain, dipped 0.01 percentage points to 1.024 per cent on Wednesday but has climbed from about 0.7 per cent in the past two months. Sterling held steady against the dollar at $1.36.
In Asia, Hong Kong’s Hang Seng share index fell 0.3 per cent while Japanese markets were closed for a holiday.
The dollar index, a gauge of the US currency’s performance against six others, was flat as traders awaited interest rate cues from the Fed.
Brent crude, the oil benchmark, dropped 1.5 per cent to $83.23 a barrel ahead of producer group Opec+ meeting on Thursday to discuss output increases. – Copyright The Financial Times Limited 2021
