Investors Eyeing Fed, ECB and BoE Meetings For Rate Guidance
Stocks were set for a cautious open on Monday as investors braced for major central bank meetings and policy decisions later this week. The Federal Reserve, European Central Bank (ECB) and Bank of England (BoE) are all expected to announce their latest interest rate moves, providing critical guidance on the trajectory of rates going forward.
The Fed in particular has been at the forefront, aggressively raising rates over the past year to tame runaway inflation. But there are signs price pressures may be moderating, leading investors to hope the central bank could slow the pace of hikes. The ECB and BoE have also been on a tightening path amid the inflation fight.
Their decisions and guidance will likely sway markets this week. According to Muhammed El-Erian, chief economic advisor at Allianz, “The trifecta of central bank meetings this week – the Fed, ECB and BoE – will influence whether equity markets build on [last week’s] gains.”
Asian Shares Gain Ahead of Central Bank Bonanza
Asian shares started the week on firmer footing, buoyed by hopes that China may ease monetary policy further after recently cutting key lending rates. Gains were capped however by caution over the upcoming Fed meeting.
Japan’s Nikkei rose 0.2% while China’s CSI 300 index gained 0.4%. Hong Kong’s Hang Seng index jumped 1.6% to a six-month high, with shares of Chinese developers surging on expectations Beijing will ramp up economic stimulus.
“The focus for markets in Asia today will be optimism over prospects for a robust policy-easing by Chinese officials,” said DailyFX strategist Margaret Yang.
Meanwhile, oil prices extended gains amid heightened Middle East tensions after a deadly attack on an Israeli-managed tanker off Oman last week. Brent crude topped $87 a barrel, having jumped 2% on Friday.
European Stocks Seen Lower Ahead of Busy Week
In Europe, stocks were set to slip at the open following a strong two-year high last week, ahead what promises to be an event-filled week. Manufacturing and GDP data as well as monetary policy decisions from the Fed, ECB and BoE will be in sharp focus.
The pan-European STOXX 600 has climbed over 6% just this month, shaking off worries over slowing global growth. Upbeat corporate earnings have helped boost sentiment.
With indexes trading near all-time peaks, some analysts say European equities could see a reality check.
“I would expect some moderation as we move through the early months of 2024,” said Mark Haefele, chief investment officer at UBS Global Wealth Management.
ING economist Carsten Brzeski notes much will hinge on guidance from central banks:
“Volatility is set to make a comeback. The trifecta of Fed, ECB and BoE decisions bears some room for surprises, despite previous communication.”
Fed, ECB And BoE In Spotlight With Rates Decisions
All eyes turn to Washington D.C. later today as the Federal Reserve kicks off its two-day policy meeting. The U.S. central bank is universally expected to raise interest rates again, taking the fed funds target range up 25 basis points to 4.5%-4.75%.
Federal Funds Rate
However, Fed Chair Jerome Powell’s comments will be closely monitored for any shift in tone or pace of tightening going forward. After an aggressive year of supersized rate hikes to squash inflation, markets hope the Fed may be close to finished and could start cutting rates before year-end.
The ECB and BoE will also be meeting this week to decide their next policy moves as Europe grapples with the energy crisis and recession risks.
The ECB, which lifted rates by a combined 250 basis points last year, may slow the pace but is still expected to deliver another half-point increase on Thursday. The BoE convenes the same day and is seen raising by a quarter point.
Naeem Aslam, chief market analyst at Ava Trade, sums up the intense focus across Atlantic this week:
“Traders are going to take their cue from the deliberations of the Fed, the ECB and the Bank of England as the bands wrap up their first policy meetings of 2024.”
Cautious, Choppy Trade Expected With Risks Remaining
With markets sitting close to highs and major macro events ahead, most strategists advise holding firm or taking profits. Some fear that overly optimistic investor sentiment may soon get tested.
“We would advocate a somewhat more defensive positioning at this juncture,” affirms Mark Haefele from UBS. He points to risks from corporate earnings that could disappoint relative to cut estimates, or higher for longer rates if inflation proves sticky.
Chris Turner, global head of markets at ING, expects “choppy range-bound trading” until more clarity emerges:
“Equity markets may stall around these levels until we get greater confidence in the inflation outlook and policy response.”
Others see recession worries continuing to weigh on European stocks. “We expect a contraction in earnings next year and advise investors to avoid risky assets tied to economic growth,” says Credit Suisse.
That may leave markets drifting lower according to technical analyst Rodolfo Panama:
“In the short-term, persistent overhead resistance and bearish momentum suggest European shares will likely struggle for meaningful gains.”
With so much uncertainty still prevailing, it seems prudent for investors to brace for more volatility in the weeks ahead. The policy signals from central banks could spark increased churn, especially if the messaging dashes market hopes for an imminent policy pivot. Caution remains the operative word.
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