Global stocks at three-week highs as Fed decision looms

A pedestrian looks at an electronic board showing the stock market indices of various countries outside a brokerage in Tokyo, Japan – REUTERS

World stocks inched to a three-week high on Thursday while the dollar drifted lower against other currencies, as investors consolidated positions ahead of a nail-biting US Federal Reserve interest rate decision.

There was a sense of relief as much as anything that after months of market speculation and advice from almost everyone from the IMF to the heads of the world’s top companies, that the wait for the Fed’s verdict would be over by 1800 GMT.

Europe’s main share markets were left at a virtual standstill with Britain’s FTSE 100, Germany’s DAX and France’s CAC 40 all barely budged after two days of gains helped by a flurry of merger activity.

Currency and bond market moves were low key too.

The dollar was under mild pressure mostly from the euro after weak US inflation data had underscored one of the arguments for the Fed to hold fire, while oil and some other key commodities gave back some of their recent gains.

“We think it is going to be a very close call (for the Fed),” said Stephen Chiu, a strategist at Mitsubishi UFJ Financial Group in Hong Kong.

“Communicating the future path of interest rates is very important and the Fed would be careful not to signal any excessive tightening given global markets are still very vulnerable.”

The US central bank’s move is garnering such intense attention because it would be the first rise in its interest rates since 2006 and from the near zero they have been at since the height of global financial crisis in late 2008.

While the markets have expected it to hike for most of this year, those expectations have faded following a bout of global market turmoil over the last couple of months, especially in China.

Futures pricing suggests an only 1 in 4 chance that it will pull the trigger. The latest poll by Reuters on Wednesday also showed the majority of economists now expect no hike, although it remains an extremely close call. 

Fed focus

Despite a late dip 2% in volatile Chinese stocks, MSCI’s broadest index of Asia-Pacific shares outside Japan rose 0.6% to its highest level in three weeks.

Japan’s Nikkei climbed 1.4% too while Australian and Malaysian shares rose 1 and 1.8%.

Even if the Fed were to raise rates, many market players expect officials to signal a dovish stance on the pace of future increases, rather than herald a brisk series of increases.

There is also the comfort that both the European Central Bank and the Bank of Japan appear to be gearing up for fresh rounds of stimulus and rates are still being cut in many parts of the world.

Switzerland’s central bank left its policy of negative interest rates unchanged on Thursday as it seeks to weaken a “significantly overvalued” Swiss franc. It also predicted a deeper-than-expected bout of deflation due to low oil prices.

The oil price slumped between April and August but has since steadied and it was holding on to sharp gains made on Wednesday in early European trading.

US West Texas Intermediate (WTI) crude futures were last at $ 47.21 per barrel, while Brent had dipped back to just under $ 50 a barrel.

Gold prices also consolidated gains it had made on Wednesday at it hovered at $ 1,120 per ounce. Silver was also at its highest level in three weeks at $ 14.90 per ounce.

The yield on the US two-year note held near a 4 1/2-year high at 0.803%. Even if the Fed doesn’t pull the trigger later it is still expected to by the end of the year.

Euro zone bond yields meanwhile were largely steady, as France and Spain faced the uncomfortable task of selling debt hours before the US rate decision.

France plans to sell 7-8 billion euros of medium-term bonds, as well as 1.0-1.5 billion of inflation-linked debt. Spain is due to sell 4-5 billion of bonds maturing in up to 10 years.

“(The Fed meeting) could have a slightly dampening impact on demand and keep some investors sidelined,” said KBC rate strategist Mathias van der Jeugt, who expects the Fed to hike rates but signal a very slow pace of future tightening.