US stocks opened marginally lower on Wednesday as investors looked ahead to the Federal Reserve’s monetary policy decision, in which the US central bank is expected to raise rates again to keep up the fight against inflation.
The blue-chip S&P 500 fell 0.1 per cent, while the tech-heavy Nasdaq dipped 0.2 per cent. The KBW Bank index lost 0.6 per cent, and shares in First Republic, the regional lender at the centre of the crisis, dropped 2.7 per cent.
Futures markets indicate traders are expecting the Fed to raise rates by 0.25 percentage points from the current range of 4.5 per cent to 4.75 per cent.
Expectations that interest rates would stay elevated for an extended period of time have ebbed in recent weeks, as traders bet that turmoil in the banking sector triggered by the collapse of Silicon Valley Bank and UBS’s takeover of rival Credit Suisse would force the Fed to slow or even pause its tightening cycle.
“There are great uncertainties as to whether the Fed can both tighten and simultaneously try to ease the stress for, among other things, the regional banks,” said analysts at SEB Research.
The Fed will also publish revised projections about the path for monetary policy to 2025, as well as forecasts for growth, unemployment and inflation. The US central bank last published officials’ estimates in December, when most thought the federal funds rate would peak at 5 per cent to 5.25 per cent.
European equities were up slightly in afternoon trade. The region-wide Stoxx 600 and the Cac 40 in Paris were both 0.2 per cent higher, while Germany’s Dax rose 0.4 per cent, recouping early losses.
London’s FTSE 100 rose 0.1 per cent after UK inflation unexpectedly jumped to 10.4 per cent in February, bolstering market expectations that the Bank of England would increase its benchmark interest rate on Thursday. Investors now expect a quarter-point rate rise from the BoE.
“I think the BoE have got the same choice that the European Central Bank had last week and the Fed have tonight,” said Neil Birrell, chief investment officer for Premier Miton. “The equation is raising rates to beat inflation, but not squash the economy and make sure the financial system remains robust — that makes everything more difficult.”
Sterling rose 0.2 per cent against the dollar, approaching a two-month high while the yield on the 10-year gilt rose 0.12 percentage points to 3.49 per cent. The yield on two-year gilts rose 0.21 percentage points to 3.49 per cent. Yields move inversely to price.
US Treasuries slid, with the yield on the two-year note, which is sensitive to interest rate expectations, rising 0.05 percentage points to 4.23 per cent. The yield on the 10-year note rose 0.01 percentage points to 3.62 per cent.
ECB president Christine Lagarde warned on Wednesday of a “tit-for-tat” dynamic between workers and companies which shifts up profit margins and wages, increasing price pressures as both groups try to avoid a hit from higher inflation. Her comments pushed the euro up slightly to a five-week high of $1.080 against the dollar.
Efforts to curb contagion in the financial system, including a suggestion from US Treasury secretary Janet Yellen that the government could step in to back all deposits at the country’s smaller lenders, had helped assuage nerves on Tuesday.
The Euro Stoxx Banks index rose 0.4 per cent, adding to the gains of 3.8 per cent in the previous session. The Hang Seng Finance index and Topix Banks index were up 1.7 per cent and 2.2 per cent respectively.
Asian stocks advanced, with Hong Kong’s Hang Seng index adding 1.7 per cent and South Korea’s Kospi rising 1.2 per cent. Japan’s Topix jumped 1.7 per cent after markets reopened following a one-day break for the vernal equinox holiday.
Oil prices fell, with US marker West Texas Intermediate slipping 0.3 per cent to trade at $69.45 a barrel, breaking a two-day advance of nearly 4 per cent. The international benchmark Brent crude lost 0.2 per cent to $75.17.
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