European stocks pulled back from a five-week high Wednesday, with investors bracing for an expected hike in borrowing costs by the Federal Reserve, while retail shares were showing strength.
Italian stocks fared the worst in the region as the country begins to gear up for a national election next year.
How markets fared: The Stoxx Europe 600 index /zigman2/quotes/210599654/delayed XX:SXXP +1.87% ended down 0.2% at 390.70, pulling back from its highest close since Nov. 8 reached on Tuesday.
Among national indexes, Italy’s FTSE MIB was hit the hardest as it slid 1.4% to close at 22,400.19.
In Frankfurt, the DAX 30 index /zigman2/quotes/210597999/delayed DX:DAX +1.82% fell 0.4% to 13,125.64, and in Paris, the CAC 40 /zigman2/quotes/210597958/delayed FR:PX1 +2.48% dropped 0.5% at 5,399.45.
In London, the FTSE 100 /zigman2/quotes/210598409/delayed UK:UKX +2.01% closed down 0.1% at 7,496.51.
The euro /zigman2/quotes/210561242/realtime/sampled EURUSD +0.3684% traded at $1.1764, up from $1.1743 late Tuesday in New York.
What’s moving markets: Markets have essentially priced in an announcement of a quarter-percentage-point interest-rate hike by the U.S. central bank.
But there are still questions about how many more rate increases will come from the Fed, especially as its moves influence prices for a range of assets. Outgoing Fed Chairwoman Janet Yellen will hold a news conference at the conclusion of the bank’s two-day meeting. The decision is due at 7 p.m. London time, or 2 p.m. Eastern. Yellen’s conference is scheduled for 2:30 p.m. Eastern.
Meanwhile, the European Central Bank and the Bank of England will issue policy decision on Thursday, with investors eager to hear more on their thinking on inflation and economic growth. In the U.K., consumer-price inflation has reached 3.1%, more than a percentage point higher than the central bank’s target.
Italy: Italian stocks as well as bond prices were knocked lower after Italian officials said a general election will be held on March 4. As bond prices dropped, the yield on Italy’s 10-year bond /zigman2/quotes/211347230/realtime BX:TMBMKIT-10Y -0.34% surged 9 basis points to 1.787%, according to Tradeweb.
Brown Brothers Harriman in a note said polls suggest a close race between Italy’s main political forces. The three are the center-right Forza Italia party led by former Italian Prime Minister Silvio Berlusconi, the euroskeptic 5 Star Movement, and the governing center-left Democratic Party.
“However, no party or block is drawing more than 40% of the vote, and this warns that perhaps the new electoral law has not gone far enough to ensure a more stable government,” said currency strategists at Brown Brothers Harriman led by Marc Chandler.
If “the Italian election will not lead to a decision to leave the European Union or the Economic and Monetary, then what may appear as the overreaction by investors may create a new buying opportunity,” said BBH. “In the near-term, however, Italian assets are likely to give back some the outperformance seen earlier this year.”
Stock movers: Italian bank stocks posted some of the biggest losses Wednesday. Unione di Banche Italiane SpA /zigman2/quotes/200732627/delayed IT:UBI +2.64% dropped 4.1%, Banco BPM SpA /zigman2/quotes/204236087/delayed IT:BAMI +2.19% lost 4.5% and UniCredit SpA /zigman2/quotes/200769686/delayed IT:UCG +1.77% fell 4.7%.
Inditex /zigman2/quotes/203681809/delayed ES:ITX +1.54% gained 1.7% after the parent company of apparel retailer Zara said the winter sales season got off to a more robust start than anticipated, with revenue rising 6% in the nine-month period. But profit margins remain under pressure.
NCC AB shares /zigman2/quotes/202096030/delayed SE:NCC.B +1.61% tumbled 8.9% as the Swedish construction company said it’s raising provisions in construction and civil-engineering projects during the fourth quarter and warned that operating profit “is expected to be close to zero.”
Dixons Carphone PLC shares jumped 8.5% as the electronics retailer said it logged record Black Friday sales and that it’s working on addressing issues at its mobile division.
Innogy SE shares sank 13%, with the Germany energy company citing a difficult retail energy market in the U.K. as reason it’s cutting its forecasts for 2017 and 2018. Innogy runs U.K. electricity and gas supplier nPower.