US and European stocks experienced a decline as investors awaited interest rate decisions that would be made by the Federal Reserve next week. The S&P 500, a key benchmark on Wall Street, saw a 0.3% decrease, relinquishing earlier gains. The Nasdaq Composite, which is heavily focused on tech stocks, fell by 1%. European indices followed suit, with the region-wide Stoxx 600 closing the day down by 0.2% and France’s Cac 40 experiencing a 0.1% drop. The FTSE 100 in London, on the other hand, traded flat.
Market participants were preparing for the upcoming two-day meeting of the Federal Reserve, with expectations leaning toward no change in the Fed’s target range, which currently stands at 5.25-5.5%. There is a belief that the Fed’s tightening campaign will resume in July due to strong economic data, putting pressure on the central bank to manage demand and control inflation.
Investors have adopted a “wait-and-see” approach, hoping that the narrative of disinflation gains traction. Small-cap stocks, as represented by the Russell 2000 index, saw a rise of 1.7%, reaching their highest level since the regional banking crisis in March. The index has outperformed the S&P 500 and Nasdaq Composite, with an almost 8% increase since the end of May, while the latter two have risen by 2%.
The rise in small-cap stocks can be attributed to the recovery of US regional bank stocks, which re-entered the investment-grade bond market this week, marking their first entry since the onset of the banking crisis. The KBW regional banking index gained 2.8% on Wednesday, extending its rally from the previous session.
Germany’s Dax closed 0.2% lower after April’s industrial production data showed a rebound of 0.3% in the eurozone’s largest economy, falling short of economists’ expectations of a 0.6% rise.
Investors are closely monitoring data ahead of the European Central Bank’s meeting next week, where it is anticipated that the deposit rate will be raised from its current level of 3.25% to combat lingering inflation. Although annual consumer prices in the eurozone rose by 6.1% in May, down from 7% in April, they are still expected to remain at levels that prompt policymakers to continue raising rates.
Asian equities displayed mixed performance, with Hong Kong’s Hang Seng index rising by 0.8%, while Japan’s Topix fell by 1.3%. China’s CSI 300 experienced a loss of 0.5% following data revealing a larger-than-expected contraction in Chinese exports for May. Exports shrank by 7.5% compared to the same period last year, significantly below analysts’ forecasted contraction of 0.4%.
The Turkish lira witnessed a significant decline, reaching a new record low of 23.2 against the US dollar, as Turkey eased its longstanding battle to defend the currency.