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European stocks dip as Fed meeting looms

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European equities dipped from a record high reached on Friday as investors turned cautious ahead of the US Federal Reserve’s latest monetary policy decision on Wednesday.

The Stoxx Europe 600 index fell 0.4 per cent in early dealings, following declines in Asia driven by a crackdown on education companies in China and jitters about the US central bank moving closer to reining in its pandemic era asset purchases. London’s FTSE 100 fell 0.5 per cent.

The Fed has purchased $120bn of bonds each month since last March in a bid to support economic recovery from the depths of the pandemic, depressing the yields on government debt and other credit instruments and boosting the appeal of equities.

Economists do not widely expect any hard guidance on when the bond-buying programme will be reduced from Fed chair Jay Powell at the conclusion of this week’s meeting. But a split has opened up among Fed officials about when to shift towards tapering after US consumer price inflation accelerated to 5.4 per cent in the 12 months to June.

“The minutes to the June [Federal Reserve] meeting and rhetoric from Fed officials suggest that there is a division among members on the timing, pace and composition of tapering,” ANZ economist Tom Kenny said.

St Louis Fed president James Bullard told the Wall Street Journal earlier this month that “the time is right” to pull back on monetary stimulus. Dallas Fed Robert Kaplan has also strongly advocated for reducing stimulus measures.

Government bond prices rose on Monday, however, in response to deep falls in Asian equity markets. China’s CSI 300 share index dropped 3.2 per cent after the Beijing government over the weekend banned academic tuition groups from making profits, raising capital or going public.

The clampdown followed a flurry of antitrust and other moves against Chinese technology companies including ride-hailing app Didi Chuxing and ecommerce group Alibaba. Hong Kong’s Hang Seng index fell 3.7 per cent and South Korea’s Kospi 200 lost 1 per cent.

The yield on the benchmark 10-year US Treasury bond, which moves inversely to its price, dropped 0.05 percentage points to 1.238 per cent. Germany’s equivalent Bund yield fell 0.02 percentage points to minus 0.435 per cent.

Analysts have been surprised by swift falls in the benchmark Treasury yield from close to 1.8 per cent in March, despite rising inflation rates and Fed officials last month bringing their forecast for the first post-pandemic rate rise forward by a year to 2023.

Some have blamed traders buying back into Treasuries after liquidating overly aggressive short positions that were wrong-footed by the Fed’s Powell insisting that high inflation was a temporary effect of the economy reopening from shutdowns last year.

Others say the Treasury market remains focused on the economic growth threats from the highly transmissible Delta variant of coronavirus.

“The Treasury market has been signalling a full-on growth scare,” strategists at Jefferies wrote in a research note, even though there was “a complete lack of evidence of growth collapsing”.

In currencies, the euro was flat against the dollar to purchase $1.1776 after hitting its lowest since early April last week as the European Central Bank signalled it would maintain deeply negative interest rates. Sterling added 0.1 per cent to $1.3762. The dollar index, which charts the progress of the greenback against major currencies, fell 0.1 per cent.

Brent crude, the international oil benchmark, fell 1.8 per cent to $72.76 a barrel.

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