Stocks struggle for direction as traders assess monetary policy direction

Global stocks struggled for direction on Wednesday as investors balanced recession risks with hopes the US central bank may soften its plans for aggressive interest rate hikes.

Europe’s regional Stoxx 600 share index added 0.2 per cent in morning trades, following a bruising session across equity markets on Tuesday after social media group Snap warned on macroeconomic conditions and investors took fright over disappointing US housing data and business surveys.

London’s FTSE 100 added 0.3 per cent, while futures trading implied Wall Street’s S&P 500 would edge 0.2 per cent lower at the New York open.

The Federal Reserve, which influences monetary policy worldwide and releases minutes of its early May rate-setting meeting later on Wednesday, has sent strong signals that it will raise borrowing costs until it has tamed inflation, which is running at four-decade highs.

However, some analysts are questioning how far the US central bank is prepared to lift rates.

“Markets are telling us that the risks of a recession are rising,” said Mary Nicola, multi-asset portfolio manager at PineBridge Investments.

But if the Fed’s account of its latest rate-setting meeting included “language that suggests a pause, or that they are concerned about growth, that could obviously really change how markets are priced”, she added.

Salman Baig, portfolio manager at Unigestion, said: “I wouldn’t be surprised if we started seeing more language about looking at the data, and a little bit of a pivot towards hiking [rates] in June and July and then starting to maybe reassess.

“It’s unlikely to be a really meaningful shift at this point, as they are going to want some pretty clear indications that inflation has turned and we are not there yet.”

US new home sales fell almost 17 per cent in April, month on month, a report on Tuesday showed. Purchasing managers’ surveys also indicated that growth in business activity in the US and UK decelerated during May.

Stocks sold off heavily on Tuesday in response to the flurry of disappointing data, with Wall Street’s tech-heavy Nasdaq Composite closing 2.3 per cent lower.

Treasury bonds, which tend to react positively to expectations of lower interest rates on cash deposits, also rallied.

The S&P 500 last week dipped into bear market territory, defined as a 20 per cent drop from a recent peak, while the Nasdaq is about 30 per cent below its November 2021 high.

The yield on the 10-year Treasury note, which underpins borrowing costs worldwide and falls as the price of the debt instrument rises, dipped 0.03 percentage points to 2.73 per cent in European morning trade on Wednesday, around a one-month low.

The two-year Treasury yield, which closely tracks interest rate expectations, traded at 2.51 per cent, having risen above 2.8 per cent in early May.

Elsewhere in markets, a broad FTSE index of Asia Pacific shares added 0.2 per cent as bourses in Hong Kong, mainland China, South Korea and Australia all closed higher.

The euro lost 0.6 per cent against the dollar to just under $1.07, as a bounce fuelled by European Central Bank president Christine Lagarde signalling the end of negative interest rates in the eurozone faded out.

Brent crude, the oil benchmark, rose 1 per cent to $114.7 a barrel.