Market news today - Fed in focus

And top of the agenda is the decision by the Federal Reserve on Wednesday, which increasingly looks like being a defining moment in the relationship between Donald Trump and the chairman of the Fed, Kevin Walsh.

Trump nominated Walsh after berating his predecessor, Jay Powell, for keeping interest rates higher than the president thought they should be.

Walsh is relatively new in the job, but he's so far shown no inclination to do the bidding of the White House.

Instead, he's focused on the need to rein in persistently above target inflation.

After some hawkish comments from Walsh at the recent Jackson Hole Economic Summit at the end of August, the markets are now pricing in a 90% chance of the Fed raising rates this week for the first time in three years.

That puts the central bank on a collision course with the president just weeks ahead of crucial midterm congressional elections in November.

The markets are viewing this week's rate decision as a test of the Fed's credibility.

Recent inflation and jobs data have pointed unambiguously towards higher rates, and an unwillingness to follow through this week could lead to concerns about the independence of the Fed.

The most recent US inflation print showed prices rising at 3.4% safely above the Fed's 2% target.

Job creation also came in much stronger than expected in August, suggesting the economy is still firing on all cylinders.

The Fed is not the only central bank in the spotlight this week.

Here in the UK, the Bank of England will make its next rate decision on Thursday, the day after inflation data is announced on Wednesday.

The current expectation is that with plenty of economic uncertainty and an important first budget of the Andy Burnham era coming up next month, the bank will hold for one more quarter.

The bank's next rate setting meeting is a few days after that budget.

But here too, the expectation is that a new tightening cycle will soon be underway.

Four rate hikes are now pencilled in for the next 12 months, up from two or three just a week ago.

Meanwhile, Japan is under enormous pressure from the US to raise its interest rates when it meets at the end of this week.

Japan's currency has recently plumbed multi-year lows against the US dollar, in part on the back of the country's still unusually low interest rates.

Japan remains one of the market's biggest potential danger zones because there are risks whatever the Bank of Japan chooses to do.

Raising interest rates may support the yen, but it also risks making homegrown investments more attractive to Japanese investors, which has the potential to trigger sales of US treasuries, of which Japan is one of the world's biggest holders.

Treasury sales would put further upward pressure on US bond yields, exacerbating the fiscal squeeze in America, which is running a budget deficit that is unparalleled in peacetime and seen by many as unsustainable.

Rising bond yields, not just in America, but the world over, are seen as one of the biggest threats to the continuing equity bull market.

The 10-year Treasury yield is approaching what's seen by some as a danger point of 5%.

At this level, the cost of borrowing risks becoming a drag on corporate profitability, reduces the present-day value of future earnings, raises the cost of funding government borrowing, and starts to offer investors a real alternative to investing in more volatile shares.

All of these risk souring market sentiment.