Markets live: FTSE 100 rebound sours as traders await Fed rates decision

The FTSE 100 faltered as an initial rebound quickly turned sour and the UK index fell back into the red by the afternoon.

London’s blue-chip index pushed 0.74 per cent higher as markets opened today, before dipping into the red by mid-morning. The FTSE pared back some of the losses by the afternoon but edged down 0.14 per cent to 6,325 points by 3pm.

The FTSE 100 lost over two per cent yesterday after global markets’ US jobs-fuelled rally ended abruptly ahead of this evening’s Federal Reserve address.

Banks, energy and commodity stocks had led the rise on optimism about a faster coronavirus recovery for the economy.

The FTSE’s initial rise today was driven by gains among financials, with Royal Bank of Scotland, Standard Life Aberdeen and Lloyds all rising over three per cent. 

Lloyds, the UK bank particularly exposed to the domestic economy, rose nearly four per cent before trading down 0.75 per cent by the afternoon. Cruise ship operator Carnival added 3.2 per cent this morning before collapsing nearly eight per cent.

“Given that the FTSE has been left behind its major US counterparts during the latest equity rally – mostly due to its heavy energy baggage, it has now potential to outperform the global recovery-led rise,” Ipek Ozkardeskaya, senior analyst at Swissquote Bank, said. For those betting for a steady and healthy normalisation in global economic activity, the FTSE is clearly a good pick.

But the FTSE 100’s rebound faltered after the OECD released a report showing the UK faces the worst economic hit from coronavirus, seeing GDP shrink 14 per cent in 2020.

Dire predictions for Europe in general also did not help Germany and France. The Dax sank 0.47 per cent while France’s Cac fell 0.46 per cent. Initially the DAX added as much as 0.83 per cent, while France’s CAC 40 gained 0.84 per cent.

All eyes on Fed for FTSE 100 investors

Joshua Mahony, senior analyst at online trader IG, said FTSE 100 and European stocks traders are becoming more risk averse after yesterday’s steep falls.

“Coming off the back of a somewhat indecisive Asian session overnight, we are seeing a similar lack of conviction in early FTSE 100 trade today,” he said. “The disconnect between markets and the real economy has been intertwined with the decision from policymakers to go over and above to support the recovery.”

Mahony said investors fear the Fed will pull back from the huge economic stimulus it has so far kept the US afloat with. Huge worldwide pledges of cash have kept markets flying high in recent weeks, helping the S&P 500 erase all its coronavirus losses earlier this week.

“However, with the [Federal Reserve] monetary policy decision there is a fear that we could see a rare backwards step for markets today given the high likeliness of a pessimistic outlook and lack of action,” Mahony added.

“At some point the Fed will have to remove some of their accommodation. The gradually diminishing QE purchases do highlight the need to normalise policy somewhat after an incredible $75bn daily asset purchase scheme implemented back in March.”

OECD spells out risk of second wave for economies

The OECD spelled out the risk of a second wave of coronavirus infections for European economies.

The UK could bounce back with nine per cent growth in 2021 if it avoids a second wave of coronavirus infections, the OECD predicted. But a second wave would lengthen the recovery tim and sharpen the current economic crisis. 

“Forecasts of a 2021 recovery [are] entirely dependent upon whether we see another surge in Covid-19 cases this year,” IG’s Mahony said.

“Given how detrimental a second wave would be, there is reason to believe we would see mainland Europe outperform under such circumstance given their relative success in combating the virus compared with the UK and US.”

US stocks mixed as investors await Fed guidance

US markets were mixed as investors awaited the Federal Reserve’s first set of economic projections for the year.

Investors expect the Fed to hold its target interest rate near zero but they will be watching for any sign of further economic stimulus.

The Dow Jones fell 0.48 per cent on opening, while the S&P 500 fluctuated before settling down 0.17 per cent by 3pm. The tech-heavy Nasdaq headed towards a new record as Apple rose 1.3 per cent in early trading to a fresh record of $349.35 per share. Amazon jumped two per cent to a high of $2,653.71.

Starbucks shares fell four per cnet lower after it said it had lost as much as $3.2bn in sales in the last quarter because of the pandemic.

What will the Federal Reserve decide?

The Federal Reserve is not expected to announce any action this evening, but markets are waiting for hints of the Fed’s economic outlook. Any hint of taking the foot off the pedal could hammer risk sentiment and lift the dollar, while more dovishness could have the opposite effect.

“The better-than-expected employment report for May suggests that the worse with regards to the pandemic is behind us, which may prompt policymakers to sound somewhat more sanguine with regards to the US economic outlook,” said JFD senior markets analyst Charalambos Pissouros. 

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“Although we don’t expect them to act, we believe that they will stay ready to do so if things fall out of orbit, which combined with a relatively not-that-worrisome language over the economic outlook, may allow equities and risk-linked assets to rebound again, as investors restart abandoning safe havens,” he continued.

“Paradoxically, a somewhat more optimistic Fed may prove negative for the US dollar, as it has been wearing its safe-haven suit recently.”

Overnight, Asian stocks pushed higher to reach fresh three-month highs, with MSCI’s broadest index of Asia-Pacific shares outside Japan, which has climbed nine per cent higher in June and is 35 per cent above its March lows, rose 0.5 per cent.

Japan’s Nikkei 225 added 0.15 per cent, while the Shanghai Composite and Hang Seng shed 0.42 per cent and 0.10 per cent respectively.   

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