European stocks stabilize as markets price rocky earnings

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European stocks drifted on Tuesday after U.S. retailer Walmart issued an after-hours profit warning and investors braced for another interest rate hike from the Federal Reserve.

The European regional Stoxx 600 index edged down 0.2% in early morning trading. London’s FTSE 100 rose 0.4%.

Walmart shares fell nearly 10% in after-hours trading in New York after the retailer warned of profits for the second time in 10 weeks, blaming inflation on food and fuel so that consumers spend less on items such as clothing.

Wall Street’s S&P 500 futures fell 0.3% after an indecisive session on Monday as corporate earnings season was in full swing. Markets hesitated as investors digested corporate results and watched the U.S. central bank’s upcoming decision.

Swiss bank UBS on Tuesday released quarterly results that beat analysts’ forecasts after clients of its wealth management unit pulled out of volatile financial markets. Branded consumer goods group Unilever, however, raised its full-year revenue forecast as it managed to raise prices to counter rising costs.

Microsoft and Alphabet, Google’s parent company, will release their quarterly results after the U.S. market closes on Tuesday, with an update from Amazon and Apple on Thursday.

Most analysts expect the Federal Reserve, which begins its final monetary policy meeting two days later on Tuesday, to respond to soaring inflation by raising its benchmark rate by 0.75 percentage points to achieve a range of 2.25% to 2.5%.

Futures markets are calling on the Fed to keep raising rates until next February and then cut them again, due to the widespread view that an impending economic slowdown will bring inflation under control. Consumer prices in the United States increased at an annual rate of 9.1% in June.

“The Fed’s dovish pivot may have already begun after June’s scorching CPI report,” Bank of America strategists said in a note to clients, predicting that the U.S. central bank may now recognize “a slowdown in economic activity”.

But Tiffany Wilding, North American economist at bond investor Pimco, said the Fed could still rapidly increase borrowing costs in the near term. She pinned the odds of a 1 percentage point rise Wednesday at 50:50.

“The current level [of rates] is still dovish, and this is increasingly out of step with economic fundamentals, including the high level of inflation,” she said.

The yield on the two-year US Treasury note, which tracks monetary policy expectations, edged down 0.03 percentage points to 2.95%. The benchmark 10-year yield fell 0.03 percentage points to 2.79%, indicating a rise in the price of US government debt.

The yield on the 10-year German Bund, the benchmark for eurozone bonds, remained stable at around 1%.

In Asia, Hong Kong’s Hang Seng index rose 1.7% after reports of support from the Beijing government for struggling Chinese property developers. Tokyo’s Topix closed flat that day.

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