Opening Bell: Futures Point To Rebound After Majors Tumble On Hawkish Fed

Key Events

Global stocks dropped this morning while futures on the S&P 500, Dow, NASDAQ 100 and Russell 2000 pointed to a mild rebound after investor anxiety over the end of economic growth was exacerbated by a hawkish Fed on Wednesday. The dollar weakened, while the yen rallied on investor flight to safety.

The STOXX 600 opened 0.75% lower on heightened fears that tightening US policy—with the Fed pressing ahead with a fourth hike yesterday and forecasting two more increases next year—will choke the global economy. The pan-European benchmark then dropped further, to - 0.93%, hitting the lowest level in 25 months, where it was trading near the day’s low. The DAX, FTSE 100 and CAC 40 also hit their lowest levels in two years.

The Fed's monetary policy messages—with the central bank's outlook for raising rates next year reduced from the three to two hikes but still perceived as hawkish after recent expectations policymakers would pause the tightening path altogether—combined with persistent worries over a slowing global economy are likely to weigh heavily on cyclical stocks like miners. These shares were pressured today, sliding 3 to 4 percent on the back of falling metal and crude oil prices, with aluminum hitting a 16-month lows as the US lifted sanctions against Russian heavyweight Rusal (MCX:RUAL), the world’s second largest aluminum company. However, the metal was bouncing back in the late European morning session.

In the earlier Asian session, equities edged lower across all major exchanges. Investors rushed to their selling button after Wednesday's rate hike made them suddenly feel overweight on equities.

China’s Shanghai Composite shed 0.52 percent, hitting a two-month low even amid the introduction of a new lending tool to support funding to small and private companies. Japan’s Nikkei dropped 2.84 percent to a 15-month low, as the Bank of Japan confirmed its already ultra-loose policy, warning against stagnant inflation and a looming consumption tax hike next year. The BoJ's outlook is in stark contrast with the one recently posted by the Fed, which remains confident about the US economy and unconcerned about market volatility.

Global Financial Affairs

Yesterday, US stocks tumbled to a 15-month low and all major benchmarks topped out, after Chairman Jerome Powell said the Fed’s balance sheet normalization would continue “on automatic pilot," quashing hopes of further accommodation amid a volatile economic outlook.

A fourth hike for the year and the continued path to higher interest rate could be seen as a vote of confidence on the strength of the American economy and the resilience of financial markets. As such, we would have have expected investors, who sold off after softer economic guidance last quarter, to rebalance their portfolios by buying stocks. However, the market is forward-thinking so it may already be focusing on growing recession risks.

The S&P 500 lost 1.54 percent, with all 11 sectors in red territory. Communication Services (-2.14%) underperformed while Utilities (-0.16%) were the best performing sector, having posted a record close last Thursday.

The Dow Jones Industrial Average fell 1.49 percent, posting the lowest close in 13 months and completing an official top after the 50 DMA crossed below the 100 DMA, triggering the much-feared Death Cross. However, with less than 1 percent penetration, investors should beware of a bear trap.

Meanwhile, the yield on 10-year Treasurys rebounded from a four-day rout, as the 50 DMA crossed below the 100 DMA, while the greenback dropped despite the Fed's rebalancing towards a more hawkish stance, as nervous investors fled to safe havens.

Increased demand for safety pushed USD/JPY below its 100 DMA, with the pair breaking the downside of a symmetrical triangle as well as falling below its uptrend line.

Gold also jumped above its 200 DMA, after retesting a bullish flag yesterday. Could yesterday's rate hike push the precious metal to $1,300? Possibly.

Conversely, oil resumed its selloff, erasing yesterday’s bounce, after Saudi Arabia’s finance minister said he’s comfortable with current prices, re-igniting investor pessimism over global growth prospects.

Up Ahead

• Bank of England policy decision is due Thursday.
• US personal income and spending data are due Friday, along with a GDP reading for the third quarter.

Market Moves

Stocks

• The Stoxx Europe 600 slipped 1.4 percent, to the lowest level in more than two years on the largest dip in more than a week.
• The MSCI All-Country World Index slid 0.6 percent, hitting the lowest level in 20 months with its fifth consecutive decline.
• The MSCI Emerging Market Index dropped 0.9 percent to the lowest level in seven weeks.

Currencies

•  The Dollar Index fell 0.68 percent, trading at the very bottom of the session, the lowest level in a month.
•  The euro rose 0.4 percent to $1.1376, the strongest level in a month on the biggest advance in a week.
•  The Japanese yen climbed 0.5 percent to 112.48 per dollar, hitting the strongest level in almost eight weeks with its fifth straight advance.
•  The British pound gained 0.3 percent to $1.261, the strongest level in more than a week on the biggest advance in a week.

Bonds

• The yield on 10-year Treasuries was unchanged at 2.75 percent, the lowest in almost nine months.
• Germany’s 10-year yield dipped three basis points to 0.24 percent, the lowest in 20 months.
• Britain’s 10-year yield decreased five basis points to 1.274 percent, the lowest level in more than a week on the biggest dip in more than a week.
• The spread of Italy’s 10-year bonds over Germany’s rose four basis points to 2.5334 percentage points.

Commodities

• The Bloomberg Commodity Index fell 0.6 percent to the lowest in 18 months.
• LME copper dropped 0.4 percent to $6,015.00 per metric ton.
• Gold ticked 0.5 percent higher to $1,243.08 an ounce.