European shares rally ahead of Federal Reserve rate decision

European shares climbed on Wednesday following two volatile days of trading across global markets, with investors braced for an interest rate decision by the US Federal Reserve.

Europe’s Stoxx 600 index rose 1.2 per cent, building on an increase from the previous day. The region-wide share barometer fell 3.8 per cent on Monday during a turbulent trading session in which Wall Street equities also swung.

Futures tracking the US S&P 500 index rose 0.4 per cent in early Chicago trading, although the blue-chip stock benchmark remained at risk of posting its worst January on record. Nasdaq 100 futures, which follow an index of the biggest stocks on the tech-heavy Nasdaq Composite, advanced 0.9 per cent.

The US central bank is set to finish a two-day monetary policy meeting on Wednesday and is expected to signal plans for its first coronavirus pandemic-era interest rate rise in March.

Markets have priced about four rate rises by December as the Fed rolls back its ultra-loose monetary policies, which have boosted stock markets and increased demand for speculative assets.

“[The Fed has] turned more hawkish, and in the latest data there is nothing to justify [officials] retracing or softening their language,” said Anne Beaudu, co-head of global bond at fund manager Amundi.

In minutes from its December meeting, the Fed revealed its officials had discussed shrinking the central bank’s $9tn balance sheet, which has ballooned after it bought vast quantities of US Treasuries and other debt assets to suppress companies’ and households borrowing costs since March 2020.

The annual rate of US consumer price inflation reached an almost 40-year high of 7 per cent last month, with price rises broadening out from areas hit by pandemic-related supply chain bottlenecks into most categories, including food and rent. Unemployment has fallen to near pre-pandemic levels, while labour shortages and record job openings have spurred wage growth.

The Fed’s hawkish pivot has dented stock market valuations worldwide, because higher interest rates lower the present value of companies’ future profits in investors’ models. Speculative technology stocks have taken some of the biggest blows.

But selling has also extended to other equity market sectors as investors queried whether a rapid cycle of rate rises would threaten economic growth.

At one point on Tuesday, the Russell 3000 index, a broad gauge of US-listed shares, traded 32 per cent below its 52-week high, according to calculations by Bespoke Investment Group. About a third of the stocks on the index were trading below their levels at the end of 2019.

US Treasury markets were steady on Wednesday as bond investors waited for an update from the Fed on its future purchasing plans. The yield on the benchmark 10-year Treasury note, which has climbed from about 1.5 per cent at the end of last year, ticked 0.01 percentage point lower to 1.78 per cent.