European stocks and US futures dip ahead of interest rate decisions

European stocks and US futures slipped on Monday with central banks on either side of the Atlantic poised to lift interest rates to their highest levels since the global financial crisis.

The region-wide Stoxx Europe 600 traded 0.5 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 by 5.8 per cent in the year to January, up from 5.5 per cent in December. The euro gained 0.3 per cent against the dollar and the yield on 10-year German Bunds rose 0.06 percentage points to 2.3 per cent. Bond yields move inversely to prices.

Contracts tracking Wall Street’s blue-chip S&P 500 and those tracking the tech-heavy Nasdaq 100 fell 0.9 per cent and 1.2 per cent respectively ahead of the New York open. The UK’s FTSE 100 was trading flat at the middle of the session.

The moves come ahead of policy meetings at the Federal Reserve, European Central Bank and Bank of England this week. Investors expect the Fed to slow the pace of its monetary tightening to 0.25 percentage points, raising rates to the highest level since September 2007, while the BoE and the ECB are widely expected to lift rates by half a percentage point to their highest levels since autumn 2008.

Slowing inflation in Europe and the US has nevertheless boosted hopes that rates are close to peaking, with some investors forecasting cuts later this year. Central bank officials, however, are set to resist such calls when fielding questions later this week.

Investors are likely to “keep looking through the Fed’s more hawkish policy guidance”, said Lee Hardman, currency analyst at MUFG. “We are not convinced that the Fed will be able to trigger significant hawkish repricing in markets.”

Equity markets have rallied so far this year on growing optimism that global growth will be less anaemic than previously 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, determined to drag down inflation, are attempting 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 key question for the BoE, 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 ECB rate cuts in 2024 were “premature”.

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.

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