US stock futures turned lower on Tuesday and government bonds came under pressure, as investors awaited a closely watched interest rate decision by the US Federal Reserve.
Contracts tracking Wall Street’s S&P 500 gauge lost 0.7 per cent, while those tracking the technology-heavy Nasdaq 100 fell 0.8 per cent.
In Europe, the regional Stoxx Europe 600 gauge dropped 0.8 per cent, reversing earlier gains, while London’s FTSE 100 slipped 0.4 per cent as traders returned to their desks following a UK public holiday to mark the state funeral of Queen Elizabeth.
Trading volumes are expected to remain light ahead of multiple central bank meetings this week, with rate-setters poised to discuss how far they can jack up borrowing costs to curb price growth in the face of a global economic downturn.
Shares in Ford slipped almost 5 per cent in pre-market dealings on Tuesday, after the carmaker said on Monday that inflation-related supplier costs during the third quarter would run about $1bn higher than originally expected. That announcement came days after a profit warning from FedEx, seen as a bellwether of global economic growth, led the group’s shares to their biggest daily drop on record.
Yields on US government debt ticked upwards on Tuesday, after reaching their highest levels in more than a decade on Monday ahead of the start of the Fed’s two-day meeting at which rate-setters are widely expected to deliver a third consecutive jumbo 0.75 percentage point rate increase.
The yield on the 10-year US Treasury note added 0.06 percentage points to 3.56 per cent, having pushed above the 3.5 per cent threshold in the previous session for the first time since April 2011. The yield on the policy-sensitive two-year bond remained at a 15-year high of 3.96 per cent. Bond yields rise as their prices fall.
Selling pressure was more pronounced in eurozone debt markets, with the yield on the 10-year German Bund up 0.13 percentage points to 1.92 per cent. The UK’s 10-year gilt yield also added 0.13 percentage points to 3.29 per cent, while the two-year gilt yield rose 0.18 percentage points to 3.29 per cent.
In the UK, markets are pricing in the likelihood of the Bank of England raising interest rates by 0.75 percentage points this week in response to high inflation, following a 0.5 percentage point increase in August, the sharpest rise in 27 years. Swifter action on rates by other central banks has increased the pressure on the BoE to step up the pace of monetary tightening to combat inflation and support the pound.
Sterling slipped 0.1 per cent to $1.142 after sinking on Friday to its lowest level against the dollar since 1985. The pound has lost almost 16 per cent so far this year with business confidence sliding as the UK economy hovers on the brink of a recession that could last until the end of 2023, according to the BoE’s forecast.
Sweden’s central bank raised its policy interest rate by a full percentage point to 1.75 per cent on Tuesday, a bigger move than expected by analysts and the largest increase since the early 1990s. The Riksbank said pushing up interest rates would reduce the risk that high inflation would persist over the longer term. Inflation is running at 9 per cent in Sweden, a 30-year high, and the central bank has forecast that the economy will shrink by 0.7 per cent in 2023.
Central banks in Japan, Norway, Brazil, South Africa, Philippines, Indonesia, Taiwan, Turkey and Switzerland are also due to announce their latest decisions on interest rates this week, leading to additional financial tightening globally.