European shares rally ahead of Federal Reserve rate decision

European shares and Wall Street stock futures rallied on Wednesday, after two volatile days of trading across global markets, as investors braced for the conclusion of the US central bank’s latest monetary policy meeting.

Europe’s Stoxx 600 index rose 2 per cent, building on an increase from the previous day. The region-wide share barometer fell 3.8 per cent on Monday, while Wall Street equities have swung wildly this week as expectations swept markets of the Federal Reserve aggressively raising borrowing costs to stamp down on inflation.

On Wednesday morning, futures contracts tracking the US S&P 500 index rose 1.2 per cent while those tracking the technology-focused Nasdaq 100 rose 1.8 per cent.

The US central bank finishes its latest monetary policy meeting on Wednesday and is widely expected to signal plans for an interest rate rise in March. That would mark two years since the Fed pulled its main funds rate down to almost zero to counter the economic shocks of the coronavirus pandemic, while it has also not embarked on a rate rising cycle since 2018.

Earlier this month, JPMorgan chief executive Jamie Dimon said there was a “pretty good chance” of more than four rate rises this year, which have already been priced in to futures markets, with the possibility of six or seven.

As higher interest rates lower the present value of companies’ future profits in investors’ models, the S&P 500 has fallen almost 9 per cent during January, with speculative technology stocks sustaining the heaviest blows.

But market pricing on Wednesday morning suggested traders now expected the Fed to “soothe fears of an aggressive tightening cycle,” said Investec strategist Roger Lee.

“Interest rates have been declining since 2019 so the market is having to adjust to a completely new environment and that inevitably is going to be very complicated and difficult,” he said.

“But its hard today to think the Fed will be more hawkish than some of the hawks in the market are fearing.”

The annual rate of US consumer price inflation reached an almost 40-year high of 7 per cent last month, with price rises broadening out from areas hit by pandemic-related supply chain bottlenecks into most categories, including food and rent. Unemployment has fallen to near pre-Covid 19 levels. Labour shortages and record job openings have also spurred wage growth.

“They have to act,” said Anne Beaudu, co-head of global bond markets at fund manager Amundi. But widespread speculation that had built up this week about the Fed signalling a half a percentage point rate rise in March was misplaced, she added.

“We don’t think they will want to shock the market at the start of the process.”

US Treasury markets were steady as bond investors waited for an update from the Fed on its future purchasing plans. The yield on the benchmark 10-year Treasury note, which has climbed from about 1.5 per cent at the end of last year, was flat at 1.79 per cent.

Asian stocks were also volatile on Wednesday. China’s CSI 300 index skirted a technical bear market before closing 0.7 per cent higher. In Tokyo, the Nikkei 225 fell 0.4 per cent.