Global Stocks Rise Ahead of Fed Decision
By Jon Sindreu
World stocks rose Wednesday ahead of the Federal Reserve's policy statement due later in the day, with officials widely expected to raise interest rates and provide clues on their future path.
Futures pointed to a 0.2% opening gain for the S&P 500 as the Stoxx Europe 600 rose 0.4% in afternoon European trade. Investors have reacted positively to a federal judge ruling that AT&T can proceed with its planned acquisition of Time Warner, seeing it as a sign that the field is clear for other corporate mergers to happen.
Money managers' focus is now shifting to central banks. Concerns about monetary stimulus ebbing have joined worries about politics and trade spats this year, creating a more volatile environment for markets.
This week, rate setters are expected to provide more details about how fast they are likely to tighten monetary policy. For many investors, the key to interpret these moves is how much longer the economy can keep powering ahead before a new recession kicks in.
Futures markets point to a 94% chance that the Fed will increase its benchmark rate by 0.25 percentage point Wednesday to a 1.75%-2% range, marking the second rise this year.
Yet, investors will closely monitor the central bank's updated growth and inflation forecasts, as well as Fed Chairman Jerome Powell's statements, because strong consumer-price data has led some of them to believe that borrowing costs could go up twice more in 2018, instead of only once.
"The Fed might be accused of being slightly behind the curve, but with inflation at these levels I suspect they are going to run the economy a little bit hot," said Patrick Spencer, Baird's vice chairman of equities, who still believes the Fed will move only once more this year. "The Fed has to be careful because it regulates the banks and doesn't want to have a banking industry dealing with an inverted yield curve."
The WSJ Dollar Index traded mostly flat Wednesday. Yields on 10-year Treasurys continued to hover just below 3%, trading at 2.953%, following Tuesday's 2.954% close.
Even after a very long expansion, recent data points to U.S. growth and inflation being robust -- whereas, unexpectedly, economic momentum seems to be weakening elsewhere. Official data released Wednesday revealed that eurozone industrial production fell by more than expected in April.
"We are largely positive, we're getting toward later cycle but it's not that late," said Chad Slater, joint chief investment officer at Morphic Asset Management. "The market's just climbing a lot of worry: People who got scared and exited long positions are now coming back."
The S&P 500 is now up more than 4% year to date.
The European Central Bank will follow Thursday with its own policy meeting. Investors will try to gauge the exact time at which eurozone officials are scheduled to end their bond-buying purchases -- a move broadly scheduled for later this year -- and whether Italy's political woes are likely to delay their plans.
So far, the ECB has signaled that it remains undeterred.
"It would be remiss of them to reverse any signal they've given," said Richard Hodges, a bond fund manager at Nomura Asset Management. "They are running out of assets to buy, so if you gave a short-term fillip to Italy this would raise longer-term concerns about financial stability."
The spread between Italian and German 10-year yields -- a broadly-monitored measure of default risk -- remains high, but tightened slightly Wednesday.
The Bank of Japan will also make its monthly policy decision Friday.
Also Wednesday, Chinese bourses closed down, with Hong Kong's Hang Seng losing 1.2% and the Shanghai Composite losing 1%. Both were pressured by shares of ZTE Corp. plunging about 40% -- an $8 billion wipeout -- on their first day of trading after nearly two months. This reflects how the Chinese telecommunications company has been grappling with vast U.S. sanctions.
Japan's Nikkei Stock Average closed up 0.4%.
By contrast, investors have mostly shrugged off this week's landmark summit between President Donald Trump and North Korea's leader Kim Jong Un, which was seen by analysts as inconclusive.
Write to Jon Sindreu at email@example.com