Stocks notch up new high but it's all about the Fed

LONDON - 20 September 2017: World stocks eked out a record high on Wednesday and the dollar dipped against major rivals with the focus on a U.S. Federal Reserve meeting that may give clues to whether the central bank will raise interest rates for a third time this year.

Wall Street was set to open flat, index futures indicated ESc1 1YMc1 NQc1, as European shares edged lower. A slight rise on Asian bourses was nevertheless enough to push MSCI’s World index .MIWD00000PUS, which tracks stocks in 46 countries, up fractionally to a new record.

But with the Fed due to unveil its policy decision and economic forecasts at 1800 GMT, caution prevailed. There was little follow-through from U.S. President Donald Trump’s bellicose rhetoric over North Korea on Tuesday.

The dollar fell less than 0.1 percent against a basket of major currencies .DXY and was down against the euro, the yen and sterling.

The Fed is expected to signal whether it will raise rates for the third time this year and to say it will start to cut its holdings of about $4.2 trillion in bonds and mortgage-backed securities next month. It will issue new economic forecasts and Fed Chair Janet Yellen holds a news conference.

Markets are pricing in a 56 percent probability of the Fed raising rates in December, according to the CME Group’s FedWatch tool.

U.S. 10-year Treasury yields US10YT=RR, which edged up on Tuesday, retreated 1.8 basis points on the day to 2.23 percent. German equivalents DE10YT=TWEB, the benchmark for euro zone borrowing costs, fell 1.3 bps to 0.44 percent.

The European Central Bank is widely expected to say next month that it will begin scaling back its asset-purchase stimulus program from January, even though a stronger euro, which dampens inflation, has complicated the outlook.

“If we move closer to a U.S. rate hike, that should come along with a bit more dollar strength and euro weakness which would harden the ECB’s exit case and be a headwind for government bonds,” said Commerzbank strategist Rainer Guntermann.

The euro rose 0.1 percent to $1.2004 EUR= while the yen rose 0.3 percent to 111.24 per dollar. Sterling, which has jumped in recent days after the Bank of England said interest rates were likely to rise in coming months, gained a further 0.4 percent to $1.3528 GBP=D3 in response to forecast-beating retail sales data.

The New Zealand dollar hit its strongest in more than a month at $0.7374 NZD= after a poll showed the ruling National Party regaining a wide lead over the opposition before Saturday's election.

NORMALIZATION

“If anything, risks to the dollar are skewed to the downside given balance sheet normalization was already well-telegraphed and should be conducted in a very gradual manner,” ING strategists wrote in a note.

The pan-European STOXX 600 share index dipped less than 0.1 percent. An index of European banks .SX7P was a leading faller, down 0.6 percent. Healthcare stocks .SXDP rose 0.3 percent.

Shares in Germany’s ThyssenKrupp (TKAG.DE) rose 3.6 percent after the company agreed with India’s Tata Steel (TISC.NS) to merge their European steel operations to create the continent’s No. 2 steelmaker. Tata shares rose 1.7 percent.

MSCI's broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS gained 0.2 percent. Japan's Nikkei .N225 closed up 0.05 percent and Shanghai .SSEC added 0.3 percent.

Oil prices rose after Iraq’s oil minister said Organization of the Petroleum Exporting Countries producers and others were considering extending a supply cut, and after data showed U.S. crude stocks were lower than expected.

Brent crude LCOc1 rose 66 cents a barrel to $55.80, just shy of a five-month high of $55.99 hit last week.

Gold XAU= edged up 0.3 percent to $1,314 an ounce as the dollar dipped.