European and Asian stock markets turned higher on Tuesday as investors awaited a closely watched interest rate decision by the US Federal Reserve.
The regional Stoxx Europe 600 share gauge added 0.8 per cent in early dealings. London’s FTSE 100 rose 0.9 per cent as traders returned to their desks following a UK public holiday to mark the state funeral of Queen Elizabeth II.
Those moves followed a late rally on Wall Street, which pushed the S&P 500 up 0.7 per cent by the close on Monday.
The positive finish on Wall Street helped Asian markets to make modest gains, with the Hang Seng index in Hong Kong trading up 1.1 per cent while China’s mainland CSI 300 gauge added 0.1 per cent and Japan’s Nikkei inched 0.4 per cent higher.
Equity trading volumes are expected to remain light ahead of a round of central bank meetings this week, amid growing uncertainty over whether policymakers will feel compelled to accelerate the pace of monetary tightening to control runaway inflation.
Yields on US government debt reached the highest levels in more than a decade on Monday ahead of the start of the Fed’s two-day meeting at which rate-setters are widely expected to deliver a third consecutive jumbo 0.75 percentage point rate increase.
The yield on the 10-year US Treasury note had pushed above 3.5 per cent for the first time since April 2011 while the yield on the two-year Treasury note — a key barometer for policy rate expectations — rose to a 15-year high of 3.94 per cent.
In the UK, markets are pricing in the likelihood of the Bank of England raising interest rates by at least 0.5 percentage points this week in response to high inflation, following a 0.5 percentage point increase in August — the sharpest rise in 27 years.
Sterling moved up to $1.145 after sinking on Friday to its lowest level against the dollar since 1985. The pound has lost almost 16 per cent so far this year with business confidence sliding as the UK economy hovers on the brink of a recession which could last until the end of 2023, according to the Bank of England’s forecast.
Central banks in Japan, Sweden, Norway, Brazil, South Africa, Philippines, Indonesia, Taiwan, Turkey and Switzerland are all due to announce their latest decisions on interest rates during this week, leading to additional financial tightening globally.