European stock markets tumbled into the red on Tuesday as traders returned after the UK bank holiday that marked the funeral of Queen Elizabeth.
In London, the FTSE 100 (^FTSE) was 0.7% by the end of the day, despite opening 1% higher, ahead of a big week of central bank interest rate decisions and a mini Budget.
It comes as the Bank of England is expected to decide on another 0.5% rate hike when policymakers meet later this week. Speculation is growing that the monetary policy committee could vote for a 0.75% hike given that inflation looks set to head back up to double digits.
“Business as usual has quietly resumed on the London Stock Exchange after the sombre, historic scenes in Westminster, and trading is expected to be pretty muted,” Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown said.
“The FTSE 100 has opened higher, taking a lead from the close on Wall Street, and cheered by the lifting of a chunk of COVID restrictions in China.
“But investors are largely expected to be biding their time, waiting for a flurry of central bank activity later in the week, with large rate hikes expected on both sides of the Atlantic.”
The US Federal Reserve is expected to raise interest rates for the third time in a row on Wednesday.
Michael Hewson of CMC Markets said: “Last week’s jump in US core CPI has seen a significant repricing in where the Fed funds rate might be by the end of this year, from between 3.5% to 4%, to as high as 4.5% by the end of Q1 2023, along with concerns the Fed might hike by 100bps tomorrow.
“This repricing has also pushed the US dollar back up towards its highest levels in 20 years, which in turn is exporting the US inflation problem to the rest of the world, with the pound at 37-year lows against the US dollar, the euro at 20-year lows and the Japanese yen at 24-year lows.”
Oil has dropped too, with Brent crude (BZ=F) now down over 2% at $90.16 per barrel.
Watch: How does inflation affect interest rates?
Asian stocks enjoyed a much-needed bounce overnight as markets took their cue from Wall Street’s late rally.
Tokyo also returned from a long weekend to post healthy gains, with the Nikkei (^N225) climbing 0.4% on the day.
It came as China spent a record amount of money on Russian energy last month as it continues to expand its reliance on the Kremlin in the wake of the Ukraine war.
Beijing forked out some $8.3bn (£7.3bn) on a haul that included a record amount of coal. In the six months since the start of the war, China has spent $44bn in total.
Watch: What are SPACs?