Stocks fell from all-time highs ahead of the Federal Reserve decision and as political uncertainties in Europe drove traders to the safest corners of the market.
A sense of caution prevailed as investors braced for amplified swings at a time when volatility has been relatively subdued. With the Fed widely expected to hold borrowing costs at a two-decade high on Wednesday, there’s less certainty on officials’ quarterly rate projections, known as the “dot plot.” Hours before that, traders will also get a fresh read on inflation — which is forecast to show prices are cooling, but still running ahead of the central bank’s comfort zone.
“We expect Fed Chair Powell and company to maintain a position that stresses potential rate cuts remain contingent on the committee seeing further progress made on bringing down price pressures,” said Anthony Saglimbene at Ameriprise. “Outside of how this week’s inflation updates come in, trends across consumer and producer prices over recent months have shown mixed progress.”
Meantime, investor demand for haven assets rose as unease over political upheaval in Europe intensified. Traders were focused on speculation that President Emmanuel Macron has been discussing resigning if his party performs poorly in upcoming legislative elections. Macron subsequently said his position won’t be affected.
The biggest moves were in French markets. The yield on 10-year notes jumped as much as 10 basis points to 3.32 per cent, putting them on course for the biggest two-day increase since the early months of the pandemic. The move has widened the spread over equivalent German bonds to the highest since October on a closing basis.
The S&P 500 dropped to around 5,340, led by losses in financial companies. The KBW Bank Index sank 2 per cent, with big names like JPMorgan Chase & Co. and Citigroup Inc. getting hit. All megacaps but Apple Inc. fell — with the iPhone maker rallying to a record.
Treasury 10-year yields dropped two basis points to 4.44 per cent ahead of a US$39 billion auction of the bonds. The dollar rose.
Sentiment and positioning indicators signal a possible short-term pullback in stock markets, driven by uncertainty around the outlook for interest rates, according to HSBC strategists, who recommend buying any dips.
“We’d expect any weakness in risk assets to be both short-lived and shallow, and we think this presents a pretty good tactical (re-)entry point,” the team including Duncan Toms and Max Kettner said.
Bank of America Corp. clients were big net buyers of U.S. equities for the first time in six weeks, led by retail investors and hedge funds, according to the firm’s strategists.
Clients bought $1.9 billion of U.S. stocks, with inflows into both single stocks and exchange-traded funds, BofA strategists led by Jill Carey Hall said.
“Despite mixed signals coming from technical indicators, economic data, inflation and global central banks, markets remain biased to the upside,” said Chris Senyek at Wolfe Research. “Investors’ ‘can’t lose’ attitude will persist for the foreseeable future on the belief that either the economic outlook is going to improve, and/or the Fed will cut.”
Bitcoin investors have reason to be particularly alert for potential volatility.
A 30-day correlation between Bitcoin and the U.S. 10-year Treasury yield is at minus 53, one of the most negative readings in data compiled by Bloomberg since 2010. The metric suggests the largest digital asset at present is moving in the opposite direction to the benchmark bond yield to an unusual degree.
Corporate Highlights:
- Shares of cryptocurrency-linked companies sank amid a drop in Bitcoin.
- General Motors Co. authorized a new $6 billion share buyback plan as improving profitability in its primary business and growth in electric vehicles allow the automaker to return cash to investors.
- Eli Lilly & Co.’s drug for Alzheimer’s has benefits that outweigh its risks, U.S. drug regulatory advisers said, bringing the treatment’s long path to the market closer to a successful end.
- Spotify Technology SA will introduce a new, higher-priced premium plan for its most ardent users later this year, according to a person familiar with the plan. Users will be charged at least $5 more per month for access to better audio and new tools for creating playlists and managing their song libraries, said the person.
Key events this week:
- China PPI, CPI, Wednesday
- Germany CPI, Wednesday
- U.S. CPI, Fed rate decision, Wednesday
- G-7 leaders summit, June 13-15
- Eurozone industrial production, Thursday
- U.S. PPI, initial jobless claims, Thursday
- Tesla annual meeting, Thursday
- New York Fed President John Williams moderates a discussion with Treasury Secretary Janet Yellen, Thursday
- Bank of Japan’s monetary policy decision, Friday
- Chicago Fed President Austan Goolsbee speaks, Friday
- U.S. University of Michigan consumer sentiment, Friday
Some of the main moves in markets:
Stocks
- The S&P 500 fell 0.4 per cent as of 10:19 a.m. New York time
- The Nasdaq 100 fell 0.2 per cent
- The Dow Jones Industrial Average fell 0.7 per cent
- The Stoxx Europe 600 fell 0.9 per cent
- The MSCI World Index fell 0.6 per cent
Currencies
- The Bloomberg Dollar Spot Index rose 0.3 per cent
- The euro fell 0.4 per cent to $1.0725
- The British pound fell 0.1 per cent to $1.2716
- The Japanese yen fell 0.1 per cent to 157.23 per dollar
Cryptocurrencies
- Bitcoin fell 4 per cent to $66,852.32
- Ether fell 3.9 per cent to $3,527.21
Bonds
- The yield on 10-year Treasuries declined two basis points to 4.44 per cent
- Germany’s 10-year yield declined four basis points to 2.63 per cent
- Britain’s 10-year yield declined five basis points to 4.27 per cent
Commodities
- West Texas Intermediate crude fell 0.2 per cent to $77.56 a barrel
- Spot gold rose 0.1 per cent to $2,314.26 an ounce
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