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London - Equities in Europe advanced, led by banks, and bonds followed Treasuries lower as investors absorbed the Federal Reserve’s plans to pursue both higher interest rates and balance-sheet reduction in the coming months.
The Stoxx Europe 600 Index was also boosted by the previous session’s drop in the euro, while lenders including Intesa Sanpaolo benefited from the prospect of higher yields. The US central bank set an October start for shrinking its balance sheet and maintained a forecast for one more rate increase this year.
The yen touched a two-month low as the Bank of Japan (BoJ) kept its monetary stimulus unchanged. As the 10-year Treasury yield edged further toward 2.30% almost all government bond yields in Europe followed it higher. The dollar pared an earlier advance and West Texas crude fell.
US policy makers’ decision to leave the benchmark interest rate unchanged was entirely expected, but their hawkish forecast for where rates will be at the end of the year caught some of the market by surprise.
The Federal Reserve’s so-called dot plot, which the central bank uses to signal its outlook for the path of interest rates, shows that policy makers expect one more rate increase this year and three more in 2018, based on median estimates.
“Yesterday was a momentous day - the beginning of the end of QE,” Bhanu Baweja a cross-asset strategist at UBS, said in an interview with Bloomberg TV. “The market for the first time is now moving closer to the dots as opposed to the dots moving towards the market. There’s more to come on that front. ”
Meanwhile, with the Fed biting the bullet over quantitative easing, investors can turn their attention to several appearances by European Central Bank officials for clues on the future of Europe’s stimulus.
Market reaction to China’s credit
downgrade by S&P Global Ratings was muted, though base metals fell,
with a rout in iron ore continuing amid concern global supplies are set
to expand while demand from the world’s second-biggest economy will
decline.
What to watch out for the rest of this week:
• Mario Draghi will be giving the keynote speech at the annual conference of the European Systemic Risk Board.
• Theresa May meets with her cabinet today to see how far she can go in promising money to the EU to advance Brexit negotiations, people familiar said. Her big speech is Friday.
•The eurozone’s September consumer confidence data is due today. South Africa has a rates decision.
• Campaigning continues in Germany before the September 24 election.
• The OECD publishes the Interim Economic Outlook in Paris.
Here are the main moves in markets:
Stocks
• The Stoxx Europe 600 Index increased 0.2% as of 12:30, the highest in two months.
• The MSCI All-Country World Index decreased 0.3% and the biggest dip in more than two weeks.
• Topix index rose less than 0.05% to the highest in more than two years.
• Futures on the S&P 500 Index dipped 0.1% and the biggest decrease in almost two weeks.
Currencies
• The Bloomberg Dollar Spot Index rose 0.1% to the highest in more than two weeks.
• The euro climbed 0.2% to $1.1913.
• The Japanese yen fell 0.2% to ¥112.49/$, hitting the weakest in more than two months.
Bonds
• The yield on 10-year Treasuries rose one basis point to 2.27%, reaching the highest in more than seven weeks on its fifth consecutive advance.
• Germany’s 10-year yield climbed four basis points to 0.48%, the highest in seven weeks.
Commodities
• West Texas Intermediate crude fell 0.4% to $50.49 a barrel.
• Gold decreased 0.5% to $1 294.38 an ounce, the weakest in almost four weeks.
• Copper declined 0.9% to $6 469.00 per metric ton, the lowest in more than five weeks.
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