To dot, or not to dot, that is the question

A look at the day ahead in European and global markets

By Stella Qiu, Correspondent

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A small pullback in oil prices was apparently all it took to get markets back in the risk-on party mood. Japan's Nikkei jumped more than 2% and South Korea surged almost 4%, so maybe ‌investors reckon oil will steady around $100 a barrel and they can live with that. As long as they don't drive, fly or eat out...

It is a brave trade that will be tested when the Federal Reserve delivers its policy decision and, just as importantly, its updated "dot plot" projections.

The exterior of the Federal Reserve Board building is seen in Washington, D.C., U.S., June 14, 2022. REUTERS/Sarah Silbiger/File Photo

The Fed meeting is shaping up to be a reality check for markets that have done their best to look past the war ⁠in the Middle East.

While policymakers are widely expected to keep interest rates in the range of 3.5% to 3.75%, the key question is whether surging global oil prices are more of a threat to inflation or a brake on economic growth, or even worse, a recipe for stagflation.

Which leads to the "dot plots" and whether the median maintains a rate cut this year and next, or drops them altogether. The assumption is that cuts will stay, but it could be a close call. A hawkish tilt would be a rude awakening for stocks and bonds, and could lift the dollar further.

Graphics are produced by Reuters

Fed Chair Jerome Powell will explain the decision in his press ‌conference and ⁠may divulge whether he intends to remain on the board as a governor when he steps down as chair in May.

The Bank of Canada also meets later on Wednesday and no policy change is expected. With inflation slowing to 1.8% in February and labour market being weak, it would likely talk of cutting if times were normal. Markets, however, are still ⁠wagering the next move will be up, with one hike fully priced in by year-end.

In Asia, oil prices fell after the Iraqi government and Kurdish authorities reached a deal to resume oil exports via Turkey's Ceyhan port. Brent crude futures dropped 2.4% ⁠to $100.97 a barrel.

S&P 500 futures rose 0.4% and Nasdaq futures gained 0.5% as investors counted down to the Fed's meeting and earnings from chipmaker Micron Technology where a blockbuster result is hoped for. Reports that Nvidia was ⁠aiming to resume shipments to China also helped underpin AI sentiment.