Global Shares Pause Ahead of Fed Decision

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06/13/2018 | 10:25 am


By Jon Sindreu



Global stocks traded sideways Wednesday ahead of the Federal Reserve's policy statement later in the day, when officials are widely expected to raise interest rates and provide further clues on their future path.



The Stoxx Europe 600 fell 0.1% in early European trade and Japan's Nikkei Stock Average closed up 0.4%.



In the U.S., futures pointed to a 0.1% opening gain for the S&P 500. Investors have reacted positively to a federal judge ruling that AT&T Inc. can proceed with its planned acquisition of Time Warner Inc., seeing it as a sign that the field is clear for other corporate mergers to happen.



Still, Chinese bourses edged down Wednesday, with Hong Kong's Hang Seng down 1.6% and the Shanghai Composite down 1%. Both were pressured by shares of ZTE Corp. plunging about 40%--an $8 billion wipeout--on their first day of trading after nearly two months, reflecting how the Chinese telecommunications giant has been grappling with vast U.S. sanctions.



By contrast, investors have mostly shrugged off this week's landmark summit between President Donald Trump and North Korea's leader Kim Jong Un, which was seen by analysts as inconclusive.



Money managers' focus is now shifting to central banks. Rate setters are expected to provide more details about how fast they are likely to tighten monetary policy at a time when the global economy appears to have lost some of its earlier momentum. But in a surprise to many economists, U.S. growth looks stronger than elsewhere, even after a very long expansion.



Futures markets point to a 94% chance that the Fed will increase its benchmark rate by 0.25 percentage point Wednesday to a 1.75%-2% range, marking the second rise this year. The question for investors is whether officials will tighten borrowing costs twice more in 2018, or only once.



"So far, the market pricing is undecided about a fourth rate hike in 2018 but the generally positive macro assessment should imply more than only one further rate hike this year," Rainer Guntermann, strategist at Commerzbank AG, told clients in a research note.



The WSJ Dollar Index edged up 0.1% Wednesday. Yields on 10-year Treasurys continued to hover right below 3%, trading at 2.964%, following Tuesday's 2.959% close.



The European Central Bank will follow Thursday with its own policy meeting. Investors will try to gauge the exact time at which eurozone officials are scheduled to end their bond-buying purchases, and whether Italy's political woes are likely to delay their plans--so far, the ECB has signaled that it remains undeterred.



The spread between Italian and German 10-year yields--a broadly-monitored measure of default risk--remains high, but tightened slightly Wednesday.



The Bank of Japan will also make its monthly policy decision Friday.



Financial markets have had a bumpy ride so far this year, as fears about politics and trade wars have joined concerns about central banks taking their feet off the gas pedal for the first time in many years. For investors, the key to interpret whether monetary policy will be too restrictive for financial assets is how much longer the economy can keep powering ahead before a new recession kicks in.



"We are largely positive, we're getting toward later cycle but it's not that late," said Chad Slater, joint chief investment officer at Morphic Asset Management. "The market's just climbing a lot of worry: People who got scared and exited long positions are now coming back."



Write to Jon Sindreu at [email protected]





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