US stocks slipped, with investors hunkering down ahead of the Federal Reserve’s policy decision on Wednesday, when the central bank is expected to raise interest rates to their highest since the 2008 financial crisis.
Wall Street’s benchmark S&P 500 finished 1.3 per cent lower on Monday, while the tech-heavy Nasdaq Composite dropped 2 per cent.
The Fed is expected to raise interest rates by a quarter of a percentage point, continuing to scale back the size of its increases. Early data have shown that the US central bank’s aggressive efforts to combat inflation are bearing fruit, but chair Jay Powell could yet buck expectations that the Fed will stop raising rates and cut them later in the year.
“A key uncertainty going into the meeting will be how Powell judges the evolution of financial conditions,” Pictet Wealth Management senior US economist Thomas Costerg wrote in a note. “The main hawkish risk in this meeting is that Powell expresses his uneasiness with the recent loosening in financial conditions, and the sharp run-up in equity prices so far this year.”
Investors are also looking ahead to Apple and Alphabet’s fourth-quarter earnings in what is a busy week for corporate results.
“We retain a least-preferred stance on US equities and the technology sector,” Mark Haefele, chief investment officer at UBS Global Wealth Management, wrote on Monday. “We do not see much scope for US markets to rally in the near term, especially given our outlook for continued pressure on corporate profit growth.”
The dollar index, which tracks the currency against a basket of six peers, gained 0.3 per cent, while 10-year Treasury yields rose 0.03 percentage points to 3.55 per cent. Bond yields move inversely to prices.
The region-wide Stoxx Europe 600 traded 0.2 per cent lower after fresh data showed a surprise 0.2 per cent drop in fourth-quarter German gross domestic product, just as Spain’s inflation rate rose 5.8 per cent in the year to January, up from 5.5 per cent in December. The UK’s FTSE 100 finished the session up 0.3 per cent.
Equity markets have rallied this year on growing optimism that global growth will be less anaemic than feared, helped by falling energy prices in Europe and China’s abrupt reversal of zero-Covid measures in place since early 2020. Yet higher equity prices are thought to raise consumer spending — exactly what central banks, which are determined to drag down inflation, are trying to prevent.
Financial conditions have been further loosened by a weaker dollar, declining Treasury yields and tighter credit spreads, according to analysts at ING, “and it may feel that any further loosening, fuelled by talk of potential policy easing in the second half of the year, could undermine [the Fed’s] current actions in fighting inflation”.
The main question for the Bank of England, meanwhile, is whether it acknowledges its work is nearly complete. “We suspect it’s more likely to keep its options open,” the analysts said, adding that market expectations of European Central Bank rate cuts in 2024 were “premature”.
Prices for Brent crude, the international oil benchmark, settled 2 per cent lower to $84.90 a barrel, following a 1.1 per cent drop last week. US benchmark West Texas Intermediate fell 2.2 per cent after shedding 2 per cent in the previous week.
In Asia, Hong Kong’s Hang Seng index fell 2.7 per cent, dragged lower by a 6 per cent decline for Alibaba. China’s CSI 300 gained roughly 0.5 per cent.
