Markets drift lower on Fed uncertainty

Central banks are coming back into focus, with the FOMC providing the first of three major meetings that will clarify thinking amid rising inflation expectations. Meanwhile, reflation and pro-cyclical stocks have helped ease the FTSE’s decline. 

• European markets drift lower.

• Reflation trade helps lift high-street and travel names.

• Traders await FOMC meeting, with inflation, growth and yields in focus.

European markets are exhibiting a similarly cautious approach as their Asian counterparts this morning, with a raft of central bank meetings looking set to lay the groundwork for monetary thinking as we move forward. Value stocks remain a key benefactor of the reopening plans, with rising US 10-year yields driving greater outperformance for pro-cyclical stocks. The FTSE 350 gainers highlight the ongoing ascent for reflation stocks, with banks, airlines, train operators, and high-street names gaining ground.  

The Federal Reserve looks to take centre stage today, with traders seeking to gauge their outlook in the face of rising inflation and treasury yield expectations. The ECB may have decided to act in a bid to dampen the rise in yields, but Powell has shown little desire to target that trend. Inflation looks to be a key topic for markets going forward, with reopening efforts expected to bring a sharp surge in prices. While the Fed and BoE are both aware of the short sharp rise in inflation that could be coming over the coming months, the big question is just how tolerant these central banks will be until they decide to tighten policy. The Fed dot plot will be crucial today, with Joe Biden’s success on the stimulus and vaccination front since December meaning we are likely to see many members adjust their interest rate forecasts accordingly.  

Ahead of the open we expect the Dow Jones to open 26 points higher, at 32,852.