World stocks cautiously higher ahead of high stakes Fed decision
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[March 22, 2023] By
Dhara Ranasinghe
LONDON (Reuters) - World stocks were cautiously higher on Wednesday as
hopes that a banking crisis would be averted were tempered by
uncertainty before a Federal Reserve meeting that sees the central bank
caught between taming inflation and maintaining stability.
Data showing British inflation unexpectedly rose to 10.4% in February
boosted expectations for a quarter point rate hike at Thursday's Bank of
England meeting, lifting sterling.
While London's FTSE stock index dipped, European stock markets more
broadly edged higher while Asia-Pacific shares outside Japan added 1.3%.
Japan's Nikkei climbed 2.0% led by a rebound in beaten-down bank
stocks.[.T]
Efforts by regulators and policymakers globally to stem banking sector
turmoil have helped steam a rout in equity markets but the mood remain
fragile. S&P 500 futures and Nasdaq futures edged down.
The spotlight was firmly on the Fed, which concludes a two-day meeting
later on Wednesday.
It is expected to raise interest rates by a quarter of a percentage
point, a decision that will land amid a brewing political storm over the
U.S. central bank's oversight of collapsed Silicon Valley Bank and with
the financial world hanging on the words of Fed chief Jerome Powell.
"So far the banking issues are more idiosyncratic than systemic, and a
system breakdown has become far less likely in the wake of the
extraordinary deposit support announced by the Fed in the wake of the
Silicon Valley Bank collapse," said Padhraic Garvey, regional head of
research, Americas at ING.
"Plus, delivery of a 25 bps hike still means the Fed is tightening,
there is likely at least another hike to come."
QT AND DOT PLOTS
An added complication is whether the Fed temporarily stops selling its
holdings of Treasury debt, known as quantitative tightening, and what
Fed members do with their dot plot forecasts for future rate hikes.
Having even priced in the risk of a rate cut last week, futures now
imply an 86% chance of a quarter-point rise to 4.75%-5.0%. A couple of
weeks ago the market had been wagering on a half-point hike.
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A man shelters under an umbrella as he
walks past the London Stock Exchange in London, Britain, August 24,
2015. REUTERS/Suzanne Plunkett/File Photo
How Powell navigates all this in his 1830 GMT news conference could
determine whether markets succumb to fresh selling or stabilise
further.
"It's almost as if we’re seeing Powell flipflop a bit between that
slightly less hawkish FOMC meeting in January/February and then his
more hawkish appearance before the Senate," said Fiona Cincotta,
market strategist at Citi Index.
"In that sense, he does need to be a bit careful about how much he
does say, because there is a risk, if you're chopping and changing
your tune so frequently of losing credibility with the markets."
Bond investors will be hoping Powell can instil some calm given the
wild volatility of recent days. Two-year Treasury yields were last
down about 6 basis points on the day at 4.11%, having made a
remarkable round-trip from 5.085% to 3.635% in just nine sessions.
European bonds have gone along for the ride. German two-year yields
overnight recording the biggest daily jump since 2008 as markets
went back to pricing in more ECB hikes.
In currency markets, sterling rose 0.6% to $1.2295 after the British
inflation data.
The euro meanwhile touched a fresh five-week high at $1.0793,
benefiting from renewed rate-hike bets.
The dollar index was a touch softer, while the dollar was a touch
weaker at 132.41 yen.
In commodities, the mild improvement in risk sentiment saw gold fade
back to $1,943 an ounce and away from Monday's top around $2,009. [GOL/]
Oil prices eased after an industry report showed U.S. crude
inventories rose unexpectedly last week in a sign fuel demand may be
weakening. [O/R]
Brent dipped 46 cents to $74.88 a barrel, while U.S. crude fell 48
cents to $69.19.
(Reporting by Dhara Ranasinghe; Additional reporting by Wayne Cole
in Sydney, Editing by Alison Williams)
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