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European stocks fall as investors brace for central bank decisions

By on September 19, 2022 0

Global equity markets started the week on a pessimistic note as investors braced for a flurry of policy decisions from central banks, including the US Federal Reserve and the Bank of Japan.

The European regional Stoxx 600 fell 0.3%, the German Dax down 0.4% and the French Cac 40 down 0.85%. Asian stocks also declined, with an MSCI gauge of stocks in the region down around 0.5%. Markets in the UK and Japan were closed for public holidays.

Monday’s dismal performance comes after the MSCI broad index barometer of developed and emerging market stocks lost 4% last week in its biggest decline since June. Concerns about the health of the economy and the specter of further large rate hikes from major central banks spooked investors.

The Fed is expected to be in the spotlight this week, with Wall Street analysts expecting the world’s most influential central bank to hike interest rates by 0.75 percentage points at the end of its meeting two days Wednesday. Market expectations for a third straight hike of this magnitude were bolstered last week by data showing that U.S. consumer price growth cooled less than expected in August.

Fed funds futures trading now suggests markets expect the Fed to raise its main interest rate to 4.4% early next year from a range of 2.25 at 2.5% currently, as policymakers try to calm inflation. Higher borrowing costs tend to put pressure on the economy, and investors are increasingly concerned that the Fed will push the economy into recession in its attempt to reduce inflation.

Amid growing concerns about the recession, the difference between short-term and long-term US bond yields, known as the “yield curve,” is sounding an increasingly loud red flag. Yields on 10-year Treasuries are now about 0.4 percentage point lower than their two-year counterparts. Longer-term bonds generally have higher yields, and an “inverted” yield curve is seen as a signal that markets are anticipating an economic slowdown.

US rate hike expectations gave a big boost to the dollar, which continued to rise on Monday. The pound was trading at just under $1.14 in European trades, near its lowest levels in 37 years, while the euro was just below parity. The Japanese yen slipped 0.3% to ¥143, after hitting a 24-year low last week before the government stepped up verbal intervention aimed at easing the country’s foreign exchange market.

The BoJ is expected to issue its final policy decision on Thursday. Most economists expect him to stick to his policy of keeping 10-year bond yields near zero as he tries to stoke more sustainable inflation in an economy that has weathered decades sluggish price growth. The Bank of England is also expected to make a policy decision on the day, with City of London analysts predicting a rate hike of 0.5 percentage points.