This week’s US central bank decision on interest rates is incredibly important to the future direction of stock markets. Investors have been feeling quite relaxed of late, with a risk-on mentality when it comes to bidding up equities. Increasingly a lot of people have become confident that US rates are close to their peak in this part of the cycle, hence a strong run for many markets since late 2022.
Russ Mould, investment director at AJ Bell, said: “But what if they’re wrong? A sense of nervousness has been creeping into the markets in recent sessions, evident by another bad showing on Wall Street last night. That’s extended to Asian and European stocks on Tuesday, causing a wobble among the main indices.
“With many stocks delivering large gains in the past few months, it’s understandable that some people want to take their money off the table. Locking in profits now means they are not gambling on what the Fed does next.
“If the central bank says rates are going to keep going up for some time, then we could easily see a sea of red on the markets. But if the Fed acknowledges inflation is cooling and notes signs of demand weakness linked to the economy, then the market might take that to mean the scale and pace of rate hikes could become more muted.
“Economically sensitive stocks were among the main fallers on the FTSE 100 on Tuesday, including packaging companies, housebuilders and banks. Sentiment is likely to have been soured by the International Monetary Fund’s latest World Economic Outlook report which flagged ‘subpar’ economic growth in 2023.
“After a spate of executive changes among large cap companies, it’s worth noting a similar trend in the small cap space. Legal firm RBG had some choice words to say about its management change.
“There were none of the usual pleasantries when a CEO departs, such as thanking them for their service. Instead, RBG was crystal clear in saying it had lost confidence in Nicola Foulston and that she had been sacked as chief executive due to ‘cultural concerns and the execution of the group’s strategy’. Given the profession and the fact Foulston owns 12.48% of the business, one might expect the drama to continue. Expect more fireworks in the coming weeks and months if Foulston decides to fight her case.”