Central bank meetings dampen markets

Stock indices on Wall Street and across Europe are slipping back in a muted start to trade in a week when sentiment is likely to remain in thrall to central banks, with meetings looming from the Federal Reserve and the Bank of Japan.

Crude prices are looking safely established above closely watched levels above the $40 a barrel mark. Brent crude has turned round from losses of over 1 per cent on the session to rise 0.5 per cent to $45.32. Nymex WTI has followed the same pattern to rise 0.3 per cent to $43.84, Oil prices last week climbed more than 4 per cent, allaying fears of a severe sell-off after major producers failed to reach an agreement to freeze output.

But energy have faced pressure after the stock market got its first chance to react to news of a major capital raising from French bellwether EDF.

Overall, the Euro Stoxx 600 is down 0.3 per cent. The FTSE 100 in London is down 0.7 per cent, while the Xetra Dax 30 in Frankfurt is 0.9 per cent weaker.

The S&P 500 has joined the trend, falling 0.4 per cent in opening exchanges, while the Dow Jones Industrial Average is weaker by the same margin.

The dollar is also looking tired, helping the euro rise 0.2 per cent at $1.1251. Sterling has more ground to make up, after the recent shadow cast over the currency by fears surrounding the UK’s potential exit from the EU. With the chances of such a ‘Brexit’ seemingly diminished after Barack Obama voiced support for the Remain campaign during his visit to the UK, the pound is up 0.6 per cent at $1.4484, trading around its highest level since mid-February.

The gain puts the pound alongside the yen as the best performing major currency of the session. The yen is 0.6 per cent stronger at Y111.13 per dollar. The index tracking the US currency against a basket of global peers is down 0.3 per cent., making it the best-performing major currency.

Traders are looking ahead to the next round of monetary policy meetings led by the Federal Reserve on Wednesday, with the Bank of Japan following on Thursday.

“The year to date has seen financial markets plagued by concerns about the global growth outlook and doubts about monetary policy,” said Marc Ostwald at ADM Investor Services.

“In terms of this week’s Federal Open Market Committee (FOMC) meeting, the key is how much the FOMC leans against markets’ very low trajectory for US official rates, the extent to which they do or do not emphasise the risks posed by the global economy and financial market instability.”

While the consensus is that the Fed will hold fire, speculation has grown that the BoJ could take action this week. Some analysts are tipping an expansion of the Japanese central bank’s exchange-traded fund purchase programme, or further cuts to already negative interest rates. The BoJ also may downgrade its growth and inflation forecasts.

Reports on Friday that the BoJ could aid banks by offering them negative rates on some loans prompted a late-day rally in Japanese bank shares while handing the yen its largest one-day and also weekly drop since October 31 2014, when the central bank boosted its quantitative easing programme.

Analysts at National Australia Bank said: "The heightened prospect of increased fiscal stimulus to support domestic demand - and rising expectations that the planned second phase of the consumption tax rise will again be deferred - would be expected to play in favour of Japanese equities further recouping recent underperformance, and weakening the yen in the process."

There was a lacklustre feel to much of the Asian session.

Tokyo’s Nikkei 225 fell 0.8 per cent. Hong Kong’s Hang Seng also fell 0.8 per cent, while on the mainland China’s Shanghai Composite shed 0.4 per cent. Markets in Australia and New Zealand were closed for the Anzac Day public holiday.

Key data points in Asia this week include Australian March quarter inflation on Wednesday and Japanese inflation on Thursday. Elsewhere, March-quarter GDP data are released for the UK on Wednesday and in the US on Thursday.

Also on Monday the People’s Bank of China fixed the reference rate for its currency at Rmb6.512 per dollar, weaker than Rmb6.5 for the first time since March 29, following the biggest weekly depreciation for the Chinese currency in four weeks.

Gold edged up 0.1 per cent to $1,233.90 an ounce.

– Copyright The Financial Times Limited 2016