Global stock markets, US yields pull back as Fed rate hike looms

Global shares and US yields edged lower on Wednesday as markets braced for what is expected to be the Federal Reserve’s 11th consecutive hike in interest rates aimed to reining in rising consumer prices. Traders expect that the Fed will announce a 25 basis point hike in rates later on Tuesday, taking the benchmark overnight interest rate to between 5.25%-5.50% - the highest level since around the global financial crisis in 2007-2009.

“The market is expecting a hike, but more of what you’re seeing is just a little pull back after a pretty strong run in the last couple of days,” said Lamar Villere, portfolio manager at Villere & Co in New Orleans.

The MSCI world equity index, which tracks shares in nearly 50 countries, was down 1.41%. In Europe, stocks fell 0.55%, on track to snap a six-day winning run, with equities in Germany and France shedding 0.7% and 1.51% respectively.

On Wall Street, the benchmark S&P 500 and the tech-heavy Nasdaq were trading lower, dragged down by mostly technology stocks, while the Dow was mostly flat.

The Dow Jones Industrial Average rose 0.03% to 35,450.17, the S&P 500 lost 0.24%, to 4,556.32 and the Nasdaq Composite dropped 0.5% to 14,073.47. “Obviously everyone is going to be curious about what the Fed says about their future plans but our expectation is that this is probably the end of the hikes,” Villere added.

US Treasury yields slipped, ending gains in the two previous sessions, ahead of the Fed’s rate decision. The yield on 10-year Treasury notes was down at 3.881%, while the two-year yield, which typically reflects interest rate expectations, fell to 4.8869%.

The dollar edged lower against major currencies. The dollar index fell 0.168%, with the euro up 0.17% to $1.1072.

Oil prices were choppy after U.S. crude inventories fell less than expected. Brent crude futures were up 0.05% at $83.68 a barrel, while U.S. West Texas Intermediate (WTI) crude fell 0.04% to $79.60. Gold prices gained buoyed by a pullback in the dollar and bond yields. Spot gold added 0.5% to $1,973.39 an ounce, while U.S. gold futures gained 0.21% to $1,966.20 an ounce.

Oil prices dipped on Wednesday, after U.S. crude inventories fell less than expected ahead of an expected Federal Reserve rate hike later in the day that could cut demand.

Brent crude futures were down 65 cents, or 0.8 %, at $82.99 a barrel by 1614 GMT (1214 p.m. ET), while U.S. West Texas Intermediate (WTI) crude was at $78.92, down 68 cents, or 0.9%. Both fell by more than $1 earlier in the session, after hitting three-month highs on Tuesday.

US crude inventories drew by 600,000 barrels in the week ended July 21, according to data from the U.S. Energy Information Administration, compared with estimates for a draw of 2.35 million barrels. Industry group American Petroleum Institute figures had indicated a 1.32 million barrels build.

Gasoline and diesel stocks also drew less than expected, EIA data showed.

“The drawdowns weren’t all that spectacular. It was a neutral to bearish report, plus the Federal Reserve rate hike can have a dampening hit on demand and prices,” said John Kilduff, partner at Again Capital LLC in New York.

Oil prices have rallied for four weeks, buoyed by signs of tighter supplies, largely linked to output cuts by Saudi Arabia and Russia, as well as Chinese authorities’ pledges to shore up the world’s second-biggest economy.

Although the market expects Saudi Arabia to roll over its August output cuts to September, sources told Reuters on Wednesday that Russia is expected to significantly increase oil loadings in September, bringing to an end steep export cuts.

Meanwhile, concern is high over whether China, also the world’s second-biggest oil consumer, will deliver on its policy pledges.

“We still need to wait for actual policies - the risk is that these policies fall short of expectations,” said ING head commodities strategist Warren Patterson.

“The market will continue to be in a tug-of-war between tightening global supply and fears of slowing demand due to the global economic slowdown,” Hiroyuki Kikukawa, president of NS Trading, a unit of Nissan Securities, added.

Investors had squared their positions ahead of the Fed rate decision, Kikukawa said.

The U.S. central bank is widely expected to deliver a 25 basis point rate hike later on Wednesday.

Higher interest rates increase borrowing costs for businesses and consumers, which could slow economic growth and reduce oil demand.  UK’s FTSE 100 closed lower on Wednesday, weighed down by weak earnings from miner Rio Tinto and the exit of NatWest Group’s CEO, with investors also cautious ahead of an expected Federal Reserve interest rate hike later in the day.

The blue chip index lost 0.2% ending a six-day winning streak, while the more domestically focussed FTSE 250 midcap index was up 0.2%.Oil prices dipped on Wednesday, after U.S. crude inventories fell less than expected ahead of an expected Federal Reserve rate hike later in the day that could cut demand.

Agencies