Tuesday 20:15 BST
What you need to know
- S&P 500 inches close to intraday record and heads above closing peak
- Stock markets in Europe edge higher amid focus on monetary policy outlook
- Dollar slips as Fed rate call looms
- Gold inches up off two-week low, havens remain under pressure
- Oil retreats from Monday’s tighter supply jump
“The impact of monetary policy settings and expectations is now drowning out just about everything else,” says Simon Derrick, chief market strategist at BNY Mellon.
“This week could see the Federal Reserve announce that it plans to start reducing its balance sheet at some point in the near future while the October meeting of the European Central Bank could see it announce a further reduction in its monthly asset purchases. The risk therefore is that either event could be the cause of significant market volatility.”
US equities edged higher into fresh record territory while the dollar slipped as markets positioned ahead of Wednesday’s policy meeting announcement by the Federal Reserve that could set out plans to shrink its balance sheet.
Momentum was muted as Wall Street’s Vix gauge of implied market volatility fell to five-week lows during the session while there was some modest selling of Treasuries.
“The broader market mood feels a little risk-on but we doubt markets will take a conviction position on trends until after the FOMC [Federal Open Market Committee] meeting,” said Shaun Osborne of Scotiabank. “For the session, we look for more consolidation in recent trends and range trading.”
The tone to trading tracked expectations that the Fed will not spring any surprises and leave interest rates unchanged while signalling the start of a multiyear process of paring back its $4.5tn balance sheet.
VTB Capital’s Neil MacKinnon argued that the Fed’s transition from quantitative easing to “quantitative tightening” would be very gradual.
“All other things being equal, any upward pressure on bond yields would be modest,” he said. “As far as the trajectory of the Fed funds rate is concerned, the dot plot is unlikely to see any material changes with FOMC members continuing to project a median 3 per cent Fed funds rate at the end of 2019.”
The S&P 500 is gaining 0.1 per cent to put it on course for its third record close, while the Dow Jones Industrial Average was also poised for a new all-time settlement high.
The index is at 2,506.37, just shy of the 2,508.32 intraday high point it reached during the previous session.
Asian stocks were more mixed. Tokyo’s Nikkei 225 Average jumped 2 per cent to hit its highest close in more than two years above the 20,000 level as it returned from a long weekend with sentiment boosted by a weakening yen.
Europe’s Euro Stoxx 600 closed marginally higher with traders increasingly looking towards Sunday’s German election. Frankfurt’s Xetra Dax closed up 0.1 per cent and Rome’s FTSE MIB, extending strong gains for the year, rose 0.3 per cent.
“One to watch this German election is a relative-value trade between the Dax and the Italian FTSE MIB,” said Kathleen Brooks of City Index.
“The Italian index has outperformed the German and overall European index since March this year, although its performance really took off over the summer. However, we believe that with the German election out of the way, political risk in Italy — which needs to hold an election by the first quarter of 2018 — may start to rise, which could weigh on the Italian index.”
Forex and fixed income
The dollar index, which measures the greenback against a basket of its peers, was 0.2 per cent weaker. The dollar ceded a two-month high against the yen hit earlier in the session to stand flat at Y111.51.
“The rising tensions with North Korea and PM Abe considering a snap election should continue playing against the yen even if the market turns risk-off,” said Ipek Ozkardeskaya of London Capital Group. “Due to the rising idiosyncratic risks, the Japanese yen is not the ideal harbour for safe haven investors.”
The euro was up 0.3 per cent to $1.1993 but off its highs for the session above $1.20 on reports that the European Central Bank is considering keeping the option open to prolong its asset purchasing scheme in 2018.
The reports, on the Reuters news agency, come at a time when the ECB is expected to look to curtailing its stimulus programme.
China’s renminbi weakened 0.1 per cent to Rmb6.5801 against the dollar, retreating further from a 21-month high of Rmb6.4349 touched two weeks ago.
The pound is 0.2 per cent higher at $1.3522 but, against the stronger euro, sterling is down 0.2 per cent to £0.8870.
The yield on Germany’s 10-year debt, which moves inversely to prices, hit a session low of 0.43 per cent after the ECB reports, down 2 basis points, before recovering to stand flat at 0.45 per cent.
10-year US Treasury yields edged 1 basis point higher to 2.24 per cent while the policy-sensitive two-year note yield was flat at 1.40 per cent as Fed deliberations started.
Oil prices retreated from the five-month highs on Monday that tracked tighter oil supplies from the Middle East.
Brent crude slipped 0.5 per cent to $55.18 a barrel while West Texas Intermediate, the main US contract, fell below the $50 mark to ease 0.7 per cent to $49.57.
Gold bounced off the two-week lows plumbed on Monday, regaining 0.3 per cent to $1,310.90 an ounce.
Additional reporting by Edward White in Hong Kong
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