Global stocks jumped on Wednesday as markets bet on a larger-than-expected interest rates raise from the Federal Reserve to tame red-hot inflation as fears of a recession mount.
"The FTSE 100 made a positive start to what could be a pivotal day in determining the next move for global markets,” said Russ Mould, investment director at AJ Bell.
"Investors seem to have anticipated the US Federal Reserve will deliver a 0.75 percentage point increase in rates tonight so the focus is likely to be on whether it goes even further, amid some fairly wild talk of a full percentage point hike."
It comes as the European Central Bank (ECB) called an unexpected meeting to discuss the recent government bonds sell-off that has been wreaking havoc on markets.
On Wednesday the ECB said it will create a new tool to combat unwarranted jumps in eurozone bond yields after the prospect of the first interest rate rises in more than a decade spooked markets.
The mechanism will tackle surging borrowing costs in weaker eurozone economies.
The central bank said it will apply flexibility in reinvesting proceeds from its pandemic bond buying programme, but it didn't say what this would mean in practice.
Bond yields have seen a sharp rise since the Bank announced a series of rate rises last week and the gap between the yields of German bonds and those of more indebted countries, such as Italy, soared to the highest in over two years.
Across the Atlantic, US benchmarks rallied after sliding into a bear market on fears that a fresh 40-year high inflation will lead to an aggressive Fed rate hike.
The Federal Open Market Committee (FOMC) is set to announce its interest rates decision later today. Investors expect a 0.75 basis points rate hike, which would be the largest lift since 1994.
Before figures on Friday showed consumer prices jumped another 1% in May from the previous month, the central bank had signalled it was poised to approve a half-point rate hike.
Michael Hewson, chief market analyst at CMC Markets, said: "A responsible Fed would look to wrestle back the narrative and do what it said it would do, which means we need to see 50bps today, with a hawkish pivot at the very least, especially if it wants to be taken seriously when it comes to future guidance.
"It’s also not apparent what a pivot to 75bps would achieve when the Fed could simply deliver a 50bps hike, today and then throw the prospect of 75bps into the hat for July, as well as September. "
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Asian stocks were mixed overnight after Chinese economic data came in slightly better than expected for a month hampered by pandemic controls.
Industrial production rose slightly by 0.7% in May compared to a year ago, analysts polled by Reuters had expected a 0.7% drop. In April, industrial production unexpectedly fell, down by 2.9% year-on-year.
Retail sales fell less than anticipated, down by 6.7% in May from a year ago. They fell 11.1% in April compared from the 12 months prior.
Watch: Fed could be considering 75 basis point rate hike