Global stocks drop amid interest rate fears

NEW YORK, United States — Stocks retreated Tuesday as investors awaited an announcement by the US Federal Reserve on its next interest rate hike, with an increase also expected this week from the Bank of England, as both countries aim to tackle soaring inflation.

The Swedish central bank meanwhile unveiled its biggest rise in three decades earlier in the day, ramping up its policy rate by a full percentage point to 1.75 percent.

Wall Street has been roiled in recent days by decidedly hawkish statements from central bankers, with the Fed expected to raise its key rate by another 0.75 percentage points. And the three major US indices all lost about one percent on the eve of the announcement.

The Fed's policy-setting Federal Open Market Committee (FOMC) is scheduled to announce its decision at 1600 GMT Wednesday.

The announcement has been the main focus for the markets after figures last week showed consumer prices are still rising at a pace not seen since the early 1980s.

"Right now the market is in wait and see mode And it's waiting to see what will happen from the Fed," said Adam Sarhan of 50 Park Investments.

"And then investors are waiting to see how the markets are going to react to that news. So at this stage, it's all about global central banks."

Frankfurt equities ended the day down 1.0 percent as news of rocketing German producer prices further fanned inflation fears, and the government appeared close to nationalizing the energy company Uniper, which has been brought low by the spike in gas prices.

London fell after reopening following the funeral of Queen Elizabeth II on Monday.

The US dollar rose against rivals while oil prices slid.

'Slam-dunk certainties'

On Thursday, the Bank of England (BoE) is predicted to deliver another sizeable increase in British borrowing costs.

"The (Swedish) hike underlined just how serious central banks are taking the inflation threat and with 75 basis point hikes from the Bank of England and Federal Reserve looking like slam-dunk certainties, the early optimism in the markets quickly evaporated," Markets.com analyst Neil Wilson told AFP.

"The reality of central bank tightening... is keeping a lid on stocks and will continue to act as a headwind for risk."

Sentiment on Wall Street was also dampened by data showing a drop in housing construction permits, although housing starts increased 12.2 percent month-on-month in August.

Asian markets meanwhile enjoyed a much-needed bounce Tuesday, tracking Wall Street's late Monday rally.

Elsewhere on Tuesday, the British pound remained under pressure, even as the BoE lines up another rate hike, after sliding on Friday to a 1985 low at $1.1351.

Oil prices continued their march lower.

"A strong US dollar, rising yields and concerns over demand as the global economy slows is weighing on crude oil prices again," said market analyst Michael Hewson at CMC Markets.