Markets rise on cautious optimism ahead of Federal Reserve decision - 17.9.2015

US stock markets advanced on Wednesday helped by rising oil prices. The dollar weakened, the ICE dollar index, a measure of dollar’s strength against a basket of six rival currencies, closed down 0.27%. The S&P 500 rose 0.9% to 1,995.31, led by energy stocks, utilities and consumer staples. Stocks traded in a range as investors were reluctant to make major bets ahead of Federal Reserve’s interest rate decision. Inflation data revealed consumer price index fell 0.1% in August after rising 0.1% in July. The monthly inflation fell for the first time since the start of the year, mainly due to 2% drop in energy prices. The inflation rose 0.2% year-over-year, below Fed’s target of 2%, with core consumer prices rising 1.8%. Market reaction to weak inflation data was consistent with “bad news is good news” pattern as low inflation performance may prevent the Fed from raising rates. At the same time short term Treasury yields closed slightly higher Wednesday after reaching record highs on Tuesday, indicating expectations for interest rate hike. Trading was thin with the trading volume at 6.03 billion shares on US exchanges, about 24% below the 20 day average. Trading today is expected to be volatile as the Federal Open Market Committee will announce its interest rate decision at 19:00 CET. According to CME Group’s FedWatch traders of fed funds futures are pricing in a 23% chance of rate hike. At 13:30 CET August current account balance, building permits and housing starts will be published in US. At the same time initial jobless claims and unemployment claims will be released. And at 15:00 CET Philadelphia Fed manufacturing index for September will be published. The tentative outlook is negative.

European stocks rallied on Wednesday propelled by pick up in merger and acquisition activity in beer industry. The euro strengthened against the dollar. The Stoxx Europe 600 rose 1.5%, recording the biggest gain in about two weeks. DAX 30 closed up 0.4%. SABMiller PLC jumped 19.9% in London after the British brewer of Miller Genuine Draft was approached about potential acquisition by rival Anheuser-Busch InBev, whose shares finished up 6.4%. In economic news inflation in the euro-zone unexpectedly fell in August as the final estimate of the annual rate of inflation was revised downward to 0.1% from an initial estimate of 0.2%. Today at 9:00 CET European Central Bank publishes its Economic Bulletin. At 10:00 CET euro-zone construction output for July will be released. And at 9:30 CET August retail sales will be published in UK. The tentative outlook is positive for the Pound.

Nikkei rose 1.4% today as yen weakened against the dollar and market sentiment was bolstered by continued gains on Wall Street and China’s markets. Tomorrow at 00:50 CET Bank of Japan monetary policy meeting minutes will be published.

Chinese stocks fell today with the Shanghai Composite Index closing down 2.1%.

Oil prices are rising today after rallying more than 4% on Wednesday following US Energy Information Administration report of 2.1 million barrels fall in crude supplies in the past week. Data also showed that total domestic oil production fell by 18,000 barrels last week to 9.12 million barrels a day.

Gold futures are rising today after recording the biggest gain in nearly a month on Wednesday as weak inflation data suggested that the Federal Reserve may refrain from hiking interest rates.