Opening Bell: Fed Rate Cut Talk Sparks Global Stock Surge, Banks Rally

Key Events

Global Stocks and futures on the S&P 500, Dow and NASDAQ 100 tracked Wall Street’s biggest jump since January this morning, after Federal Reserve Chairman Jerome Powell suggested a potential interest rate cute and Mexico expressed confidence in reaching an agreement with the U.S. that would stave off trade tariffs.

After opening lower—and thereby showing signs that a rebound from the worst selloff of the year may be fading—Europe's STOXX 600 quickly bounced back alongside travel companies and technology firms, in line with U.S. futures's quick reversal. While no one can predict what new headlines are in store for us today, we can expect volatility, reflecting investors’ frayed nerves.

In the earlier Asian session, regional equities popped higher on hopes the Fed will cut rates to offset the negative impact of ongoing trade wars. However, most indices gave up some gains after the World Bank downgraded its forecast for the world economy, citing the escalating trade disputes as a core headwind, and U.S. President Donald Trump clarified that the duties levied against Mexico were “no bluff!”.

Japan’s Nikkei 225 outperformed, surging 1.8%, while China’s Shanghai Compositelagged as the only major regional benchmark closing in the red (-0.03%). If China’s own stimulus failed to support the index from slipping almost a full percentage point yesterday, it appears that a potential Fed cut also failed to excite Chinese traders. Mexico’s confidence in resolving its dispute with the U.S. does not help China either: if anything, the less distracted Trump is with other countries, the more focused he can be on China.

Global Financial Affairs

In Tuesday’s U.S. session, shares on all four major indices jumped at least 2%—the most since Jan. 4. Powell acknowledged the uncertainty of “trade negotiations,” their possible adverse impact on the U.S. economy and the Fed’s commitment to its 2% inflation target.

“We are closely monitoring the implications of these developments for the U.S. economic outlook and, as always, we will act as appropriate to sustain the expansion,” said Powell—Fedspeak for putting a rate cut squarely on the table.

The argument for a potential rate cut was reinforced with Vice Chair Richard Clarida, who repeated the message that the Fed would “put in place policies that not only achieve but sustain price stability and maximum employment, and we’ll do that if we need to.” The move would align U.S. policymakers with global central banks, which have been less hesitant in shifting from tightening to loosening based on economic data.

Clarida made a rare reference to financial markets, saying the central bank can’t be “handcuffed” to them and suggesting it was too early to take a signal of concern from the inverted Treasury yield curve, though he would take it seriously if the situation persisted. In other words, while the Fed's monetary policy isn’t dictated by investors, the central bank might follow their lead if they are stubborn enough—which is why the financial market is a leading indicator of the economy.

UST 10-Year Daily Chart

Meanwhile, 10-year yields have erased gains that had been favored by the famous Trump trade since the presidential vote in November 2016. However, they were seen rebounding on Wednesday, on risk-on sentiment.

The S&P 500 surged 2.14%, with all sectors but Real Estate (-0.55%) in the green, as the value of new homes dropped for the first time in seven years after April pending home sales showed unexpected weakness, even as lower interest rates would make mortgages more affordable and there would be less competition for property income from yields.

Technology (3.34%) stocks outperformed thanks to their previous dip, and Materialsshares (+2.81%) surged on Mexico’s confidence in a resolution with the White House. Consumer Discretionary and Financials both leaped 2.71%. The latter, thanks to an extremely positive outlook, summed up by by Wells Fargo (NYSE:WFC) (NYSE:WFC)'s analyst Mike Mayo, that if rates were cut, banks would “party like it’s 1995,” when the big banks were strong outperformers. Citigroup (NYSE:C) (NYSE:C) sprung as much as 5.1%, sealing its biggest intraday jump since Jan. 4. Bank of America Corp (NYSE:BAC) (NYSE:BAC) climbed 4.4%, the most since Jan. 16.

S&P 500 Daily Chart

While stocks may have rallied the most since the beginning of the year, in our view the surge is part of a technical return move, after prices completed a top. Hence, the price stopped short below the neckline. Of course, bear traps exist. The 2.5% penetration of the neckline satisfies a moderate filter but not a conservative one, which would require at least 3%.

DXY Daily Chart

The Dollar Index slipped for the fourth straight day, as traders price in the much speculated rate cut. Technically, the greenback is on the cusp of completing a small double top, blowing out a small ascending channel since April. Now the bottom of a massive ascending triangle, whose uptrend line started in September is up for support, reinforced by the 200 DMA. The MACD and RSI suggest bears will give bulls a run for their money.

WTI fell on rising U.S. inventories and Russia suggesting it will stop withholding supply cuts—all this in the backdrop of concerns that trade wars will slow demand, a fear re-awakened by Trump’s “no bluff” tweet.

Up Ahead

• China President Xi Jinping begins a two-day visit to Russia on Wednesday.
• The European Central Bank sets monetary policy on Thursday. Analysts don’t expect the central bank to change its official rates at the meeting, which some anticipating the euro will be spared from its usual post-meeting slide.
• Theresa May steps down as leader of the Conservative Party on Friday.
• Friday’s U.S. jobs report is projected to show payrolls rose by 190,000 in May, unemployment held at 3.6%, a 49-year low, and average hourly earnings growth sustained a 3.2% pace.

Market Moves

Stocks

• The MSCI All-Country World Index increased 0.3%.
• The U.K.’s FTSE 100 Index rose 0.1%.

Currencies

• The Dollar Index gave up less than 0.5%.
• The euro climbed 0.1% to $1.1264, the strongest in seven weeks.
• The British pound rose 0.1% to $1.2705.
• The Japanese yen gained less than 0.05% to 108.12 per dollar.

Bonds

• The yield on 10-year Treasurys fell three basis points to 2.10%.
• Germany’s 10-year yield declined two basis points to -0.22%, the lowest on record.
• Britain’s 10-year yield slipped three basis points to 0.877%.
• Japan’s 10-year yield slid two basis points to -0.124%, the lowest in almost three years on the largest decrease in almost 10 weeks.

Commodities

• West Texas Intermediate crude dropped 0.8% to $53.04 a barrel, the lowest in more than 20 weeks.
• Gold rose 0.7% to $1,335.25 an ounce, reaching the highest in 15 weeks on its sixth consecutive advance.
• The Bloomberg Commodity Index declined 0.3%.