European stocks drifted on Tuesday after US retailer Walmart issued an after-hours profit warning and investors girded themselves for another interest rate rise from the Federal Reserve.
Europe’s regional Stoxx 600 index struggled for direction, while London’s FTSE 100 rose 0.5 per cent.
Shares in Walmart dropped almost 9 per cent in pre-market trading in New York after the retailer warned on profits for the second time in 10 weeks, blaming food and fuel inflation for consumers spending less on items such as clothing.
Futures for Wall Street’s S&P 500 pointed 0.4 per cent lower following an indecisive session on Monday as corporate earnings season got into full swing. Markets fluctuated as investors digested corporate results and eyed the upcoming US central bank decision.
Microsoft and Google parent Alphabet will post quarterly earnings after the US market close on Tuesday, with Amazon and Apple updating on Thursday. Tech is by far the largest sector in the S&P 500.
“Its hard to see how sentiment towards the US market as a whole could withstand meaningful disappointment from these tech names,” said Sunil Krishnan, head of multi-asset funds at Aviva Investors.
He said Walmart’s warning was probably a sign that “earnings expectations as a whole need to come down . . . Investors have not yet fully adjusted to what full-year results might look like.”
In Europe on Tuesday, Swiss bank UBS reported quarterly earnings that missed analysts’ forecasts after clients of its wealth management unit pulled out of volatile financial markets. Branded consumer goods group Unilever, however, upgraded its full-year revenue guidance because it had managed to raise prices to counteract higher costs.
Most analysts expect the Federal Reserve, which begins its latest two-day monetary policy meeting later on Tuesday, to respond to surging inflation by raising its funds rate by 0.75 percentage points to a range of 2.25 per cent to 2.5 per cent.
Futures markets are tipping the Fed to keep raising rates until next February and then cut again, due to a widespread view that a looming economic downturn will tame inflation. US consumer prices rose at an annual rate of 9.1 per cent in June.
“The dovish Fed pivot may have surprisingly already started after the red-hot June CPI report,” Bank of America strategists said in a note to clients, predicting that the US central bank may now acknowledge “a slowdown in economic activity”.
But Tiffany Wilding, North American economist at bond investor Pimco, said that the Fed could still raise borrowing costs quickly in the near term. She pinned the odds of a 1 percentage point rise on Wednesday at 50:50.
“The current level [of rates] is still accommodative, and that is increasingly out of sync with economic fundamentals, including the elevated level of inflation,” she said.
The yield on the two-year US Treasury note, which follows monetary policy expectations, edged 0.02 percentage point lower to 3.02 per cent. The benchmark 10-year yield dropped 0.04 percentage points to 2.78 per cent as the price of the debt security rose.
Germany’s 10-year Bund yield, the benchmark for eurozone borrowing costs, fell 0.05 percentage points to 0.98 per cent.
In Asia, Hong Kong’s Hang Seng index rose 1.7 per cent after reports of Beijing government support for ailing Chinese property developers. The Topix in Tokyo closed flat on the day.