US stocks opened higher on Wednesday ahead of the Federal Reserve’s decision on interest rates, while European markets advanced after the European Central Bank said it would protect weaker economies from higher borrowing costs.
The S&P 500 rose 1.0% shortly after the opening bell. The Dow Jones Industrial Average added 232 points, or 0.7%, and the Nasdaq Composite added 1.1%.
The Federal Reserve will lay out details of its latest efforts to suppress inflation with tighter monetary policy at 2 PM ET. Investors are expecting a 0.75 percentage point increase over the Fed’s target rate, which will be the largest since 1994. The central bank had previously directed a 0.5 percentage point increase, but price expectations turned higher after data showed inflation was on track. The fastest pace in more than four decades.
Dorian Carrell, fund manager at Schroders, said the Fed’s guidance on the direction of interest rates on Wednesday is more important to markets than the size of the rate increase..
He added that uncertainty over interest rates had led to volatility in the equity and credit markets. The S&P 500 plunged into a bear market – more than 20% down from its January peak – this week as rising expectations that the Federal Reserve will raise interest rates faster than previously indicated led to markets closing.
US government bonds have stabilized after slipping in recent weeks in a sell-off that pushed yields to their highest levels in more than a decade. The yield on the 10-year Treasury fell to 3.374% from 3.482% on Tuesday. Yields decrease as bond prices rise.
European stocks and eurozone government bonds rose after the European Central Bank said it will hold an ad hoc meeting on Wednesday to discuss the turmoil in the region’s bond markets. Investors dumped southern European government debt recently after the European Central Bank laid out plans to end its bond-buying program and raise interest rates to tame inflation.
The yield on Italian 10-year government bonds fell to 3.851% from 4.111%. Tuesday. It also fell in Greece, Spain and other eurozone members who are seen as vulnerable to higher borrowing costs.
The Stoxx Europe 600 Index rose 1.4%, led by banking and insurance stocks. Shares of Italian banks, which hold a large portion of government bonds, suffered as debt prices fell. Intesa Sanpaolo and UniCredit were among the top performers in the European market on Wednesday.
The European Central Bank has put in place a plan to buy more bonds for weaker eurozone governments under its current bond-buying programme. He tasked European Central Bank staff with accelerating the design of a new instrument that would narrow the differences in borrowing costs across the region, and address the financial imbalances that have long been a problem for the currency union.
“They wanted to make sure that funding conditions didn’t deteriorate too much,” said William Sales, chief investment officer at HSBC Private Banking and Wealth Management. He said the meeting indicated that the ECB was ready to support markets earlier than investors had expected.
Cryptocurrencies continued to decline. Bitcoin fell 4.2% to $2,080, putting the digital currency on track for its ninth straight daily loss. Ethereum slumped 6.4%, widening the trajectory of cryptocurrencies affecting companies including Coinbase Global, which is laying off nearly a fifth of its employees, and Celsius Network, a crypto lender that is now considering restructuring options. Coinbase shares were down 2.5% in pre-market trading.
Behind the cryptocurrency sell-off, and the recent turmoil in traditional financial markets, is a potential change on the part of the Federal Reserve in its efforts to quell high inflation. For years after the 2008-2009 financial crisis, stocks, bonds and more speculative assets rose as central banks held borrowing costs at low levels for inflation and economic growth.
The pandemic, whose economic effects have been combated by central banks and governments with unprecedented fiscal stimulus, has further fueled this upward trend. Rampant inflation has prompted the Fed and many of its peers to roll back their easy money policies, and the assets that benefited most from it suffer.
Corrections and amplifications
Italy’s 10-year government bond yields were flat at 4.111% on Tuesday. An earlier version of this article incorrectly stated that returns settled at 4.067%. (corrected June 15th)
Write to Joe Wallace at email@example.com
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