European stocks rebound ahead of Fed interest rate decision

European stocks opened higher on Wednesday, rebounding after losses in the previous session, as investors prepared for the US Federal Reserve’s latest decision on interest rates.

The pan-European Stoxx 600 rose 0.4 per cent in the first hour of trading, Germany’s Dax added 0.5 per cent and the FTSE 100 gained 0.5 per cent.

The moves reversed some of Tuesday’s losses, when US and European stock markets fell on gloomy inflation data and renewed fears over the health of US regional banks.

The failure of First Republic over the weekend was the second-largest bank failure in US history and triggered steep losses on Tuesday for smaller banks like PacWest and Western Alliance. The KBW Regional Banking index lost 5.5 per cent, its worst session since March 17. The benchmark S&P 500 fell 1.2 per cent and the Nasdaq Composite slipped 1.1 per cent.

On Wednesday, US futures remained mostly flat, with contracts for the S&P 500 up 0.1 per cent and those tracking the tech-heavy Nasdaq Composite flat.

Investors were also looking ahead to the outcome of the Fed’s policy meeting later on Wednesday. Traders are pricing in that the Fed will increase rates by another 0.25 percentage points, taking its benchmark policy rate to a new target range of 5-5.25 per cent and its highest level since 2007.

However, the market is also expecting the increase to be the last of the Fed’s aggressive monetary tightening campaign, with economic pressures building on the US central bank.

Data on Tuesday showed the US had the lowest number of job openings in almost two years, indicating the economy was slowing.

Traders were also preparing for the latest policy meeting of the European Central Bank on Thursday, where rising eurozone inflation has raised concerns that it will increase benchmark rates.

Asian stocks declined on the renewed fears about the health of US regional banks.

South Korea’s Kospi declined 0.9 per cent, Hong Kong’s Hang Seng index dropped 1.3 per cent and Australia’s S&P/ASX 200 fell 1 per cent. Markets in mainland China and Japan were closed for holidays.

The yield on the US 10-year Treasury note, which underpins global borrowing costs, was up 0.01 percentage points at 3.43 per cent on Wednesday, after falling 0.13 percentage points the previous day.

The yield on the two-year note, which closely mirrors short-term interest rate expectations, rose 0.03 percentage points to 3.988 per cent. Yields move inversely to price.

Oil prices also steadied after falling around 5 per cent on Tuesday on signs of cooling US and Chinese demand. Brent crude, the international benchmark fell 0.2 per cent to trade at $75.21 per barrel, while US marker West Texas Intermediate slipped 0.2 per cent to $71.49.

Additional reporting by Hudson Lockett in Hong Kong