Global Shares Pause Ahead of Fed Decision
By Jon Sindreu
World stocks traded sideways Wednesday ahead of the Federal Reserve's policy statement due later in the day, with officials widely expected to raise interest rates and provide clues on their future path.
The Stoxx Europe 600 rose 0.3% in morning 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.
Chinese bourses edged down Wednesday, with Hong Kong's Hang Seng down 1.2% 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. This reflects 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. Concerns about monetary stimulus ebbing have joined worries about politics and trade wars this year, creating a more volatile environment for markets.
This week, rate setters are expected to provide more details about how fast they are likely to tighten monetary policy. For many investors, the key to interpret these moves is how much longer the economy can keep powering ahead before a new recession kicks in.
Even after a very long expansion, recent data points to U.S. growth and inflation being robust -- whereas, unexpectedly, economic momentum seems to be weakening elsewhere. Official data released Wednesday revealed that eurozone industrial production fell by more than expected in April.
"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."
The S&P 500 is now up more than 4% year to date.
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. Recent inflation prints suggest officials could tighten borrowing costs twice more in 2018, instead of 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 note.
The WSJ Dollar Index edged up 0.1% Wednesday. Yields on 10-year Treasurys continued to hover just below 3%, trading at 2.964%, following Tuesday's 2.954% 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 -- a move broadly scheduled for later this year -- and whether Italy's political woes are likely to delay their plans.
So far, the ECB has signaled that it remains undeterred.
"It would be remiss of them to reverse any signal they've given," said Dickie Hodges, a bond fund manager at Nomura Asset Managenent. "They are running out of assets to buy, so if you gave a short-term fillip to Italy this would raise longer-term concerns about financial stability."
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.
Write to Jon Sindreu at [email protected]