Global Markets: Shares hemmed in by dollar and Fed rate expectations

By Sujata Rao

LONDON (Reuters) - World stocks inched higher on Wednesday after two days of losses but remained pinned down by the dollar's recent surge and expectations that a U.S. Federal Reserve meeting later in the day will signal further policy tightening ahead.

Forecast-beating results from U.S. tech giant Apple helped lift shares in technology shares worldwide, but with investor focus firmly on the Fed, equity futures were tipping only a marginally firmer open for Wall Street later in the day.

Currency markets have been in the limelight this week, with the dollar roaring higher to erase all year-to-date losses versus a basket of currencies. It stands now at 3-1/2 month highs on growing signs the Fed will be the only major central bank to raise interest rates in the coming months.

In contrast to the United States, where inflation and growth indicators have generally surprised to the upside, rate rise expectations elsewhere have receded after a string of disappointing economic data.

Expectations of a Bank of England rate hike this month have virtually been priced out, while the European Central Bank as well as central banks in Japan, Switzerland and Sweden have all hinted that policy tightening remains some way off.

The Fed should announce at 1800 GMT that it is holding interest rates steady but will likely encourage expectations of an increase in borrowing costs in June. Those expectations were strengthened after a survey on Tuesday suggested inflationary pressures were building.

"It is this concern around inflation and the robustness of the U.S. economy that is likely to dominate when the Fed concludes its meeting," said Michael Hewson, chief market analyst at CMC Markets in London.

"It will offer policymakers a decent opportunity to critique the health of the U.S. economy."

That dollar eased slightly, however, after two days of robust gains, as the euro firmed 0.3 percent off 3-1/2-month lows hit on Tuesday. But world stocks remained under pressure, eking out a meagre 0.16 percent rise after two days of hefty losses.

That was despite a stronger close for Wall Street, driven by optimism over trade issues and generally buoyant company results. Shares in Apple rose 4 percent in after-market trade after its results exceeded expectations, especially in smart-phone sales.

Apple shares listed in Germany surged almost 6 percent and were some 3.6 percent higher in pre-market trade.

Its results also helped European equities almost half a percent higher. European tech firms, including Apple suppliers such as AMS rose strongly, with a tech shares index hitting a six-week peak.

The tech giant's forecast-beating results are the icing on the cake for U.S. companies on the S&P500 index, which have posted first-quarter earnings growth around 10 percent, according to Thomson Reuters.

But markets have reacted cautiously due to concerns for the profits outlook, given cost pressures stemming from oil and metals prices hitting multi-year highs in recent weeks.

Market participants may be starting to wonder that "perhaps this is as good as it's going to get," said Stephen Innes, head of trading in Asia-Pacific for Oanda in Singapore.

Stock markets are also nervous about the recent rise in U.S. bond yields, with 10-year yields at 2.99 percent, just below recent four-year highs above 3 percent.

German yields, dragged to six-week highs by the U.S. bond selloff, stood just below those levels. Markets are awaiting first-quarter growth data - a number drawing more attention than usual, because of recent signs of slowdown.

Economists polled by Reuters predicted 2.5 percent year-on-year growth versus a 2.7 percent increase in the previous quarter.

"National GDPs released so far point to a sharper slowdown in Q1 than forecast," analysts at Mizuho said in a note.

A weak reading could further pummel the euro, as money market pricing already suggests the first ECB rate hike will come only mid-2019.

(Reporting by Sujata Rao; additional reporting by Masayuki Kitano in Singapore, Helen Reid and Dhara Ranasinghe in London; Editing by Jon Boyle)