Stocks Fall, Bonds Rise as Caution Prevails Before Fed Meeting

Bloomberg.- Caution pervaded markets before the Federal Reserve’s expected interest-rate hike later Wednesday, with European stocks slipping from an 11-month high and government bonds advancing. Crude retreated on industry data showing U.S. stockpiles increased.

The Stoxx Europe 600 Index retreated before the conclusion of the Fed’s two-day meeting, as investors awaited clues on the likely path of rates in 2017. Yields on 10-year U.S. Treasuries slipped, after reaching the highest level in more than two years on Monday, while European bonds also climbed. Oil in New York slid toward $52 a barrel before an official inventories report, and currencies of commodity-exporting nations fell. Gold headed for its biggest gain in a week.

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The Fed’s path to tighter monetary policy has been delayed throughout 2016, as first instability in Chinese markets, then the shock votes for Brexit and Donald Trump, put policy makers on the defensive. The U.S. central bank is expected to boost borrowing costs just as the focus shifts back to governments, with fiscal easing at the hands of incoming U.S. President Trump speculated to drive economic growth. After Wednesday, traders see a two-in-three chance of additional rate increases from the Fed by June, futures show.

«Markets are very much on hold ahead of the Fed,” said Marc Ostwald, global strategist at ADM Investor Services International in London. “The Treasury rally is also helping to pull yields elsewhere lower, along with a slip in oil prices and a softer tone to equities. Changes to the Fed dot plot and economic forecasts will be key to watch.”

Stocks

– The Euro Stoxx 50 Index of euro-area firms declined 0.3 percent after the gauge surged more than 20 percent from its low in February, entering a so-called bull market on Tuesday. The Stoxx 600 Index fell 0.3 percent as of 8 a.m. in New York.

– Actelion Ltd. dropped 9.5 percent after Johnson & Johnson said it ended discussions for a potential deal.

– Mediaset SpA added 4.9 percent, following its biggest gain in 20 years on Monday, as Vincent Bollore’s Vivendi SA and Silvio Berlusconi’s Fininvest SpA battled for control of the Italian broadcaster.

– Metro AG gained 4.3 percent after the German retailer forecast a rise in sales and earnings for the full year.

– U.S. index futures were unchanged after the S&P 500 Index rose 0.7 percent to an all-time high and the Dow Jones Industrial Average neared 20,000 points.

Currencies

– The Bloomberg Dollar Spot Index, a gauge of the greenback against 10 major peers, declined 0.2 percent.

– Traders say the dollar should have a muted reaction to the Fed’s expected 25 basis-point hike, but may see more volatile price action in reaction to Chair Janet Yellen’s subsequent press conference.

– Russia’s ruble slipped 0.8 percent against the dollar while Norway’s krone dropped 0.5 percent.

Bonds

– The yield on 10-year Treasuries fell three basis points to 2.44 percent, after touching 2.53 percent on Dec. 12.

– The yield on similar-maturity German bonds dropped four basis points to 0.31 percent, while Italy’s fell six basis points to 1.81 percent.

– Japan’s 30-year government bonds climbed as the nation’s central bank stepped up purchases of longer-term debt.

– The Markit iTraxx Europe Crossover Index of credit-default swaps declined one basis point to 294 basis points, the lowest since April.

– The investment-grade Markit iTraxx Europe Index was little changed after falling for 11 days, the longest stretch in more than nine years.

Commodities

– West Texas Intermediate crude retreated for the first day in five, falling 1.5 percent to $52.17 a barrel. Crude is retreating as focus shifts to expanding U.S. crude stockpiles.

– U.S. inventories rose by 4.68 million barrels last week, the industry-funded American Petroleum Institute was said to report. Government data Wednesday is forecast to show supplies fell.

– Gold added 0.4 percent to $1,163.60 an ounce in the spot market.

– Zinc led a rally in most industrial metals, climbing 2 percent to $2,760 a metric ton on the London Metal Exchange, after a data showed credit in top consumer China expanded the most since March.

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