European stocks climbed on Wednesday after two days of choppy trading in global markets as investors braced for a U.S. Federal Reserve interest rate decision.
Europe’s Stoxx 600 index rose 1.2%, building on an increase from the previous day. The region-wide stock barometer fell 3.8% on Monday in a choppy trading session in which Wall Street stocks also swayed.
Futures following the U.S. S&P 500 index rose 0.4% at the start of trading in Chicago, although the benchmark for blue-chip stocks continues to risk posting its worst January on record . Nasdaq 100 futures, which track an index of the largest stocks in the tech-heavy Nasdaq Composite, rose 0.9%.
The U.S. central bank is set to wrap up a two-day monetary policy meeting on Wednesday and is expected to signal plans for its first interest rate hike in the era of the coronavirus pandemic in March.
Markets have forecast about four rate hikes by December as the Fed reverses its ultra-loose monetary policies, which have boosted stock markets and increased demand for speculative assets.
“[The Fed has] has become more hawkish, and in the latest data there is nothing to justify [officials] retracing or softening their language,” said Anne Beaudu, co-head of global bonds at fund manager Amundi.
In the minutes of its December meeting, the Fed revealed that its officials had discussed shrinking the central bank’s $9 billion balance sheet, which swelled after buying large amounts of US Treasuries and bonds. other debt assets to remove corporate and household borrowing costs since March 2020.
The annual rate of consumer price inflation in the United States hit a nearly 40-year high of 7% last month, with price increases spreading from areas affected by chain bottlenecks pandemic-related supply cuts in most categories, including food and rent. Unemployment has fallen to near pre-pandemic levels, while labor shortages and record job creations have boosted wage growth.
The Fed’s hawkish pivot has weighed on stock market valuations around the world as higher interest rates reduce the present value of future corporate earnings in investors’ models. Speculative tech stocks took some of the biggest hits.
But the selloff also spread to other sectors of the stock market, with investors wondering if a rapid rate hike cycle would threaten economic growth.
At one point on Tuesday, the Russell 3000 Index, a broad gauge of U.S.-listed stocks, was trading 32% below its 52-week high, according to calculations by Bespoke Investment Group. About a third of the stocks in the index were trading below their levels at the end of 2019.
US Treasury markets were flat on Wednesday as bond investors awaited an update from the Fed on its future buying plans. The yield on the benchmark 10-year Treasury note, which rose from around 1.5% at the end of last year, fell 0.01 percentage point to 1.78%.
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