European equities and US stock futures rallied in response to hopes for peace talks between Russia and Ukraine and Chinese economic stimulus, soothing market jitters ahead of an anticipated US interest rate decision.
The regional Stoxx 600 share index gained 2.8 per cent by midday in London on Wednesday. Germany’s Xetra Dax added 3.3 per cent while London’s FTSE 100 rose 1.4 per cent.
Futures trading implied Wall Street’s benchmark S&P 500 share index would open 1.3 per cent higher, while the technology-focused Nasdaq 100 would gain 1.8 per cent.
Ukrainian president Volodymyr Zelensky said talks with Russia were becoming “more realistic” following another night of heavy shelling.
Meanwhile, Liu He, Chinese president Xi Jinping’s closest economic adviser, said on Wednesday that Beijing would take measures to “boost the economy in the first quarter”, as well as introduce “policies that are favorite to the market”.
Some investors at present view short-term equity market rallies as fragile, put at risk by the unpredictability of the war as well as central banks tightening monetary policy to battle high inflation. The Stoxx remains more than 8 per cent lower for the year while the Dax has lost about a tenth.
“High volatility makes these markets difficult to trade,” said Jeremy Gatto, multi-asset fund manager at Unigestion.
At the conclusion of its monetary policy meeting later on Wednesday, the US Federal Reserve is expected to raise interest rates for the first time since 2018 and signal a path towards further rises this year. The annual pace of consumer price inflation in the US hit a fresh 40-year high of 7.9 per cent in February.
“We could be in a situation later this afternoon where we get negative news on Ukraine-Russia or the Fed could be more hawkish [about future rate rises] than expected,” Gatto cautioned. “It’s best to stay neutral.”
China’s economy continues to be affected by the nation’s zero-coronavirus policies, which have led to widespread social restrictions and trade disruptions. Shanghai and Shenzhen, two key commerce hubs, are in partial lockdown while Chinese businesses are grappling with western sanctions against Russia pushing up prices of energy, metals and agricultural commodities.
In Asia, Hong Kong’s Hang Seng index closed 9.1 per cent higher as markets across the Asia-Pacific region rallied. The CSI 300 index of mainland Chinese shares rose 4.3 per cent and the Nikkei 225 in Tokyo added 1.6 per cent.
Bank of America strategists said they expected the Fed to raise its main funds rate by a quarter-point at the meeting, while signaling they were willing to go further.
“I think the market is clearly discounting [0.25 percentage points],” said Caspar Rock, chief investment officer at Cazenove Capital.
“If they did anything differently that would be a surprise” that could prove disruptive, he added. Investors would also focus on the so-called dot plot of Fed officials’ individual future interest rate projections and chair Jay Powell’s “commentary on the pace of further rate hikes”, Rock said.
The benchmark 10-year Treasury yield, which moves inversely to the price of the US debt security and underpins borrowing costs worldwide, was broadly steady at 2.17 per cent, close to its highest since May 2019.
The yield on Germany’s 10-year Bund, a barometer for borrowing costs in the euro area, rose 0.06 percentage points to 0.39 per cent, close to its highest level since November 2018.
The dollar index, which tends to fall when positive market sentiment reduces demand for the reserve currency, dropped 0.5 per cent.