European stocks pause before US rate call

London - Europe's stock markets turned flat on Thursday as caution prevailed before the latest interest rate decision in top economy the United States.

London's FTSE 100 index dropped 0.20% to stand at 6 216.67 points in late morning deals, despite official data showing British retail sales rose 0.2% in August from July.

In the eurozone, Frankfurt's DAX 30 added 0.15% to 10 242.20 points and the CAC 40 in Paris won just 0.02% to 4 646.63 compared with Wednesday's close.

Investors shrugged off news that European telecoms giant Altice bought US cable operator Cablevision for $17.7bn.

Later Thursday, the US Federal Reserve will reveal the outcome of the latest gathering of its Federal Open Market Committee (FOMC).

Asian equities mostly rose on Thursday, with traders broadly optimistic over the rate call.

"Traders will be eagerly awaiting the decision of this evening's FOMC Federal Funds Rate and the end of their two day meeting which could offer the first interest rate hike since the 2008 global recession," said analyst Dominic Stewart at traders ETX Capital.

The policy meeting has been the key focus for global investors for weeks as bank policymakers have to weigh a healthy US recovery with a slowdown overseas, particularly in China, the world's second biggest economy.

Rate hike around corner?

While the Fed is expected to lift rates by year end, global markets have moved broadly higher in the past few sessions, with some economists predicting the Fed will stand back from moving this month, taking into account recent China-fuelled turmoil.

Speculation is building that the Fed could delay its first interest rate rise in nine years, but the outcome of Thursday's meeting remains unclear.

In foreign exchange deals Thursday, the European single currency rose to $1.1326 from $1.1285 late in New York on Wednesday, suggesting some participants expect no change.

"US interest rates have a huge impact on the rest of the world because, not only is the US the largest economy in the world, but the dollar is used as the world's main currency," said Rebecca O'Keeffe, head of investment at brokers Interactive Investor.

"Many other countries peg their currencies versus the dollar. Many companies, or indeed sovereigns, borrow in dollars. Most international trade flows are denominated in dollars.

"Raising US interest rates is tantamount to raising the global interest rate," she told AFP.

When the US economy began to stall in 2007, the Fed slashed the rate in 10 steps from 4.75% in September 2007 to an unprecedented low level of 0% to 0.25% in December 2008.

It held the rate locked at the zero level as a way of getting the economy back to health after the deepest recession in eight decades. Now that the economy is growing steadily, many believe such a low rate is no longer warranted.

Symbolic rate hike?

Kit Juckes, global foreign exchange strategist at Societe Generale, predicted however that the Fed would lift rates to a level of 0.25% to 0.50% on Thursday in a "symbolic" move.

"Asset prices globally have been sent higher by the extraordinary monetary policies - quantitative easing and low rates - put in place since the financial crisis," Juckes said.

"Symbolically, a rate rise - even a small one to a low level - signals the end of this chapter in markets history."

There are fears a rate rise now could severely hurt the struggling world economy, hitting consumer demand and business investment.

"High interest rates encourage saving - at the expense of consumption - and discourage borrowing, reducing companies' appetite to invest in growing their business and hiring people, while discouraging families from borrowing to buy homes and so on," added Juckes.

"In an increasingly joined-up global economy, US interest rates affect the whole world."

Some analysts also warn a US hike could damage emerging markets as investors withdraw cash and turn to the US for better and safer returns.

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