Global Markets Struggle Before Fed as London Slips on Inflation

World stock markets diverged on Wednesday before a US Federal Reserve interest rate decision, with London dipping on data showing that UK inflation spiked to its highest level for more than a decade.

The British capital’s benchmark FTSE 100 slid 0.3 per cent in afternoon trading after news that UK inflation hit 5.1 percent in November, sending the pound climbing in anticipation of a possible interest rate rise.

The Paris CAC 40 index added 0.6 percent and Frankfurt’s DAX rose 0.3 percent on the eve of rate calls from both the European Central Bank and the Bank of England.

On Wall Street, both the Dow and S&P 500 opened flat, while the Nasdaq dipped ahead of the Fed rate decision later in the day.

Oil prices fell further on stubborn fears about weakening demand due to fallout from the Omicron coronavirus variant.

Inflationary pressure intensifies
Pressure is mounting on major central banks to get a grip on runaway inflation, sent soaring this year by a spike in energy prices, long-running supply chain snags and surging demand.

Asian equities mostly fell as investors nervously awaited the Fed, which is expected to announce a speedier withdrawal of its massive financial support just as Omicron fans economic recovery concerns.

The BoE is however forecast to hold its record-low interest rate, despite rampant inflation, as policymakers continue to fret over Omicron.

“The pound is on the front foot ahead of a crucial 24-hour period that sees the Fed, BoE, and ECB all release their latest monetary policy decisions,” said IG analyst Joshua Mahony.

“With UK CPI inflation reaching a 10-year high, the Bank of England will be under pressure to lay out their plans — even if they do hold off on raising rates tomorrow.

“Caught between constantly rising inflation and the prospect of a dramatic explosion in Omicron cases, the UK economic picture looks more unstable than ever.”

Data last week showed US consumer prices rose in November at their fastest pace in four decades, all but confirming that the Fed will aim to end its vast bond-buying programme sooner than expected, allowing it to begin lifting interest rates by mid-2022.

The prospect of the end of central bank largesse — put in place at the start of the pandemic — has been a huge drag on global equity markets for the past few months, bringing an end to a rally that saw many markets hit record or multi-year highs.

“Today sees the Fed grab the headlines, with traders widely expecting to see (Chairman Jerome) Powell ramp up the tapering process in response to elevated and persistent inflation pressures,” added Mahony.

Fawad Razaqzada at ThinkMarkets said the Fed “simply cannot justify not tapering QE with consumer inflation at its highest since the early 80s, producer prices racing to an all-time high, GDP already above pre-pandemic levels and the labour market being tight”.

Adding to the downbeat mood is the surge in infections caused by the Omicron coronavirus variant, which has forced governments around the world to reintroduce fresh containment measures, threatening to deal a blow to the already fragile economic rebound.

– Key figures around 1430 GMT –
London – FTSE 100: DOWN 0.3 percent at 7,195.85 points

Frankfurt – DAX: UP 0.3 percent at 15,505.88

Paris – CAC 40: UP 0.6 percent at 6,933.87

EURO STOXX 50: UP 0.6 percent at 4,168.66

New York – Dow: DOWN less than 0.1 percent at 35,529.84

Tokyo – Nikkei 225: UP 0.1 percent at 28,459.72 (close)

Hong Kong – Hang Seng Index: DOWN 0.9 percent at 23,420.76 (close)

Shanghai – Composite: DOWN 0.4 percent at 3647.63 (close)

Euro/dollar: UP at $1.1264 from $1.1259 late on Tuesday

Pound/dollar: UP at $1.3252 from $1.3231

Euro/pound: DOWN at 84.97 pence from 85.09 pence

Dollar/yen: UP at 113.87 from 113.70 yen

Brent North Sea crude: DOWN 0.8 percent at $73.13 per barrel

West Texas Intermediate: DOWN 0.9 percent at $70.12.