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High-flying European stocks wait on Fed

European equities hovered near all-time highs and government bonds softened slightly as traders held back on strong bets before the conclusion of the Federal Reserve’s latest monthly meeting.

The regional Stoxx 600 benchmark traded flat at 440.4 points, just beneath an all-time closing high achieved in mid-April following a rally fuelled by optimism about a global recovery from the pandemic and improving corporate earnings. The UK’s FTSE 100 was also flat.

The yield on the 10-year US Treasury bond, which influences borrowing costs worldwide, ticked 0.01 percentage point higher to 1.581 per cent. Bond yields move inversely to prices.

Analysts widely expect Fed chair Jay Powell to prioritise the US economic recovery and a strengthening labour market over making any moves to tame rising inflation at his press conference on Wednesday.

But investors will be on the alert for any hints that the Fed will consider rolling back its $120bn a month of bond purchases, started last March to prevent market ructions during the pandemic, in months ahead. Concerns about tapering were heightened last week when the Bank of Canada became the first G7 central bank to scale back pandemic-era monetary support measures.

“Powell is likely to emphasise that the labour market is still far from normal and that any pick-up in inflation that accompanies the recovery is likely to be transitory,” commented Chris Scicluna, economist at Daiwa.

Investors’ focus, Scicluna added, will be “on the post-meeting statement and the subsequent press conference to see whether the Fed’s medium-term view is evolving in a way that might signal the possibility of earlier policy tightening”.

The dollar index, which measures the performance of the greenback against trading partners’ currencies, traded around its lowest since early March on Wednesday. Foreign exchange traders had predicted a decline in the dollar of up to 20 per cent at the end of last year because of loose monetary conditions in the US. Those bets were upended by the fast pace of the US recovery and speculation that the Fed would eventually tighten policy.

“Investors are approaching foreign exchange markets with an abundance of caution,” said Mimi Rushton, co-head of global forex sales at Barclays, with trading volumes currently “lower than the norm”. This would likely continue until a change of the Fed’s message “gave an opportunity to recalibrate and think more clearly about the next potential moves”, she added.

In Asia, China’s CSI 300 added 0.3 per cent and Hong Kong’s Hang Seng index closed 0.1 per cent lower. Japan’s Nikkei 225 lost 0.5 per cent.

Futures markets signalled the S&P 500 would add 0.1 per cent at the start of Wall Street trading later in the day while the top 100 stocks on the technology-heavy Nasdaq Composite would add 0.2 per cent. The Nasdaq reached a new record on Tuesday evening, propelled higher by optimism about tech companies earnings ahead of quarterly reports from Microsoft, Google parent Alphabet and Facebook.

Brent crude futures rose 0.8 per cent to $66.19 a barrel.

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