European equities drifted and US Treasury bonds traded steadily on Wednesday morning, as investors held back from making large bets before the conclusion of the Federal Reserve’s latest monthly meeting.
The Stoxx 600 benchmark index was flat in early trading, while Germany’s Xetra Dax dipped 0.4 per cent and the UK’s FTSE 100 was also unmoved.
The yield on the US 10-year Treasury bond, which crossed 1 per cent for the first time since March 2020 as investors bet US President Joe Biden’s stimulus plan would fuel inflation, hovered at around 1.04 per cent. The dollar, as measured against a basket of currencies, crept 0.1 per cent higher.
The moves came ahead of the conclusion of the Fed’s first meeting of 2021. When its chair Jay Powell addresses the media later, investors will be keen for reassurance that the central bank has no immediate plans to taper its $120 billion-plus (€99 billion) of monthly debt purchases that have supported markets through the pandemic.
Any tightening of its monetary policy stance could encourage this year’s Treasuries sell-off, and ripple across asset markets, by changing the risk-free rate that underpins equity and other valuations.
Analysts and investors widely expect Mr Powell to signal there will be no changes to the central bank’s policy for at least the rest of this year, however, as rising coronavirus cases continue to inflict damage on the US economy.
“There is not much left for the Fed to do,” said Luis Costa, strategist at Citi, “away from a simple reassurance that an ultra-dovish monetary policy stance will probably stay in vogue for the next many quarters.”
Investors have shifted their focus towards fiscal policy and the strength of the economic recovery in recent weeks. Mr Biden’s $1.9 trillion coronavirus relief plan has run into opposition from Republican lawmakers, while US new unemployment claims are running at more than 900,000 a week and retail sales have declined for three consecutive months.
“An economic rebound in the US would be very dependent on stimulus but also [Covid-19] vaccines being rolled out quickly and successfully,” said Nic Hoogewijs, a bond fund manager at Lombard Odier.
“Any bump in the road would be a buying signal for safe haven instruments” such as government bonds, he added. The yield on the 10-year bond, which moves inversely to the price of the security “shouldn’t go much beyond 1.4 per cent this year”, he said.
Any big shift in monetary policy could change the picture. But the Fed’s vice-chair Richard Clarida commented earlier this month that the central bank was unlikely to move on interest rates until inflation stayed at 2 per cent “for a year”, while Mr Powell has also rebutted speculation of an early exit from the asset purchase programme.
The oil market was in a livelier mood, with Brent crude up 0.8 per cent above $56 a barrel. – Copyright The Financial Times Limited 2021