Weekly patterns on US oil trading show how the market has assessed fundamentals.
Stock futures dip slightly after Dow’s worst week since October
Traders on the floor of the New York Stock Exchange, June 18, 2021.
Stock futures dipped slightly on Sunday to kick off a new week of trading after the Dow posted its worst week since October.
Futures on the Dow Jones Industrial Average fell 49 points, or 0.15%. S&P 500 futures slid 0.16% and Nasdaq 100 futures edged 0.07% lower.
U.S. stocks fell on Friday as investors digested new economic projections from the Federal Reserve and worried rate hikes could come sooner than expected.
The Fed on Wednesday raised its inflation expectations and forecast rate hikes in 2023. St. Louis Fed President Jim Bullard said Friday on CNBC’s “Squawk Box” that it was natural for the central bank to tilt a little more “hawkish” and saw higher interest rates as soon as 2022.
The Dow dropped 3.5% last week, while the S&P 500 and Nasdaq dipped 1.9% and 0.2%, respectively, on the week.
Sectors tied to the economic recovery led last week’s dip. The S&P 500 financials and materials sectors lost more than 6% on the week, while energy fell more than 5% and industrials dropped more than 3%.
“Investors may be interpreting the Fed’s hawkish tilt Wednesday as a sign that an extended US post-pandemic economic expansion may be a bit harder to achieve in a potentially emerging environment of less accommodative monetary policy,” Goldman Sachs’ Chris Hussey said in a note.
The Treasury yield curve also flattened last week. The yields of shorter-term Treasurys, like the 2-year note, rose — reflecting expectations of the Fed raising rates. Longer-term yields, like the 10-year note, retreated — a sign of less optimism toward economic growth.
Investors await public appearances from Fed members on Monday. Bullard and Dallas Fed President Robert Kaplan are set to speak virtually on a Official Monetary and Financial Institutions Forum panel at 9:00 a.m. ET. New York Fed President John Williams is expected to deliver remarks at a Midsize Bank Coalition of America event Monday afternoon.
Biden laid the foundations for an alliance to preserve democracy
To comprehend the audacious ambition behind President Joe Biden’s Europe trip this week, think of him less as U.S. commander-in-chief and more as the democratic (small “d”) world’s physician-in-charge.
Eighty years ago, as far fewer democracies were under siege by surging authoritarian forces, Franklin Roosevelt in his famous “Four Freedoms” speech to Congress in 1941, proclaimed himself Dr. Win-the-War. Now as democratic world faces a renewed assault, it’s Biden’s turn to be Dr. Save-Democracy.
Having repeatedly provided his diagnosis of the cancers endangering global democracies, Biden this past week accelerated the course of treatment. Like any good physician, he understands cure and recovery remain uncertain after so many years of invasive and metastasizing disease.
Waiting any longer would have ensured the patient’s failure in what Biden has diagnosed as an “inflection point” in the historic and systemic struggle against authoritarianism. As he said this week at NATO headquarters in Brussels, laying out a theme underpinning his entire presidency: “We have to prove to the world and our own people that that democracy can still prevail against the challenges of our time and deliver for the needs of our people.”
While the 78-year-old President’s messaging and his remarkable endurance on the trip’s five whistle stops were impressive, any U.S. leader can line up a similar set of meetings. They included his bilateral with British Prime Minister Boris Johnson, followed by the G-7 gathering of the world’s leading industrial democracies, then the meeting of NATO leaders, a U.S.-European Union summit and finishing in Geneva with Russian President Vladimir Putin, the embodiment of what Biden’s fighting.
More notable is what Biden did with them. Through painstaking planning and negotiations, his team and its partners produced dozens of pages of agreements, communiques and future commitments. All of it was designed to provide a narrative thread and to provoke common cause among the world’s leading democracies.
Behind all that rests an overriding Biden administration focus on China as the challenge of our time. Unlike the Trump administration, which put itself in conflict with Europe and China simultaneously, the Biden administration has gone out of its way to rally Europeans to its side in the competition with China, even if compromise is required from individual countries and an entire European Union that count China as their leading trade partner.
The agreements achieved this past week included a Carbis Bay G-7 summit communique that contained, among much more, commitments to provide the world a further billion doses of Covid vaccines this year, a plan to reinvigorate member economies and a commitment toward a global minimum tax.
They included a U.S.-EU summit statement, perhaps the most underreported and underestimated of the week’s agreements, which established a number of dialogues that could forge closer cooperation on everything from Covid relief and climate change to technological cooperation and China.
“We intend to continue coordinating on our shared concerns, including ongoing human rights violations in Xinjiang and Tibet,” the statement said, “the erosion of autonomy and democratic processes in Hong Kong; economic coercion; disinformation campaigns; and regional security issues.”
The move to end a 17-year trade and tariff dispute between Boeing and Airbus also has the rising competition with China as its motivating factor. Even the three-paragraph U.S.-Russia Presidential Joint Statement on Strategic Stability had China in its sights, aimed at launching a bilateral Strategic Stability Dialogue whose aim would be to create a more predictable environment with Moscow so that Washington’s energies could be focused more squarely on Beijing.
Lingering beneath the surface of all President Biden’s meetings, however, were enduring doubts about the durability of this renewed American commitment to alliances, democratic partners and a common cause – producing some understandable whiplash among heads of state and government who had participated in meetings of a far different tone with President Trump.
Europeans have reason to wonder what the next U.S. elections might bring, as Trump and his allies still refuse to accept his electoral defeat and claim fraud. They also have their own electoral uncertainties, with German elections in September set to end Chancellor Angela Merkel’s nearly 16 years of leadership, and French President Macron facing local elections Sunday that could provide a preview for his showdown next year with Marine Le Pen.
In no small part, credit those uncertainties for Biden’s large degree of success with his partners last week, who were only too eager to embrace the change. What the Trump administration demonstrated, as have the first months of the Biden presidency, is the continued dependence of global democracies upon U.S. leadership. So why not leverage the present to put as many agreements and habits in place as possible, hoping they might be enduring.
In that spirit, the week started appropriately with the New Atlantic Charter signed with British Prime Minister Johnson, a useful reminder of what a historic difference an internationally engaged United States can make on the 80th anniversary of the original Atlantic Charter agreed by U.S. President Franklin Roosevelt and British Prime Minister Winston Churchill.
“Our revitalized Atlantic Charter,” reads the new document, “building on the commitments and aspirations set out eighty years ago, affirms our ongoing commitment to sustaining our enduring values and defending them against new and old challenges. We commit to working closely with all partners who share our democratic values and to countering the efforts of those who seek to undermine our alliances and institutions.”
It is worth recalling that almost four full months before the formal U.S. entry into World War II Roosevelt and Churchill agreed to the original charter, outlining their ambitious common aims for the post-war world, and making clear U.S. support for the British war effort, on August 14, 1941.
It is also worth reflecting on what sort of world might have emerged had the U.S. not stepped forward.
With the post-war liberal order threatened, the New Atlantic Charter could serve as a clarion call of a renewed international commitment to the revival of democracy.
Back in December of last year, I wrote in this space, “Joe Biden has that rarest of opportunities that history provides: the chance to be a transformative president.”
Biden’s trip to Europe recognizes and builds upon that opportunity. However, perhaps just as motivating is the understood but unspoken cost of failure at a time when the question about what global forces will shape the future is up for grabs.
Frederick Kempe is a best-selling author, prize-winning journalist and president & CEO of the Atlantic Council, one of the United States’ most influential think tanks on global affairs. He worked at The Wall Street Journal for more than 25 years as a foreign correspondent, assistant managing editor and as the longest-serving editor of the paper’s European edition. His latest book – “Berlin 1961: Kennedy, Khrushchev, and the Most Dangerous Place on Earth” – was a New York Times best-seller and has been published in more than a dozen languages. Follow him on Twitter @FredKempe and subscribe here to Inflection Points, his look each Saturday at the past week’s top stories and trends.
Explaining the volatile stock and bond market moves this week following the Fed’s update
The Federal Reserve unleashed a huge repositioning in global financial markets, as investors reacted to a world where the U.S. central bank is no longer guaranteeing its policies will be dovish — or easy.
The dollar surged the most in a year over a two-day period against a basket of currencies.
Stocks were mixed around the world on Thursday, as were bond markets. Many commodities sold off. The Nasdaq Composite was higher, while the S&P 500 and Dow Jones Industrial Average slid. Tech gained, and cyclical stocks fell.
The central bank delivered a strong message Wednesday when Fed Chairman Jerome Powell said officials have discussed tapering bond buying and would at some point decide to begin the process of slowing the purchases. At the same time, Fed officials added two rate hikes to their 2023 forecast, where there were none before.
“It’s the end of peak dovishness,” Bleakley Global Advisors chief investment officer Peter Boockvar said. “It’s not going hawkish. It’s just we’re past peak dovishness. This market response is as if they were already tapering.”
Strategists say the Fed’s slight step toward tightening policy didn’t shock markets Wednesday, but it will likely make them volatile going forward. The Fed, in essence, is acknowledging the door is now open to future rate hikes.
It is expected to make a fuller declaration about the bond program later this year, and then within several months start the slow process of bringing $120 billion a month in purchases down to zero.
The yields of shorter-duration Treasurys, like the 2-year note, rose. Longer duration yields, such as the benchmark 10-year, fell. That so-called “flattening” is a go-to trade when interest rates rise. The logic is that longer yields fall since the economy may not do as well in the future with higher interest rates, and short-end yields rise to reflect expectations of the Fed raising rates.
U.S. longer-dated Treasurys, like the 10-year, have been lower than many strategists had expected lately. That’s in part because they are highly attractive to foreign buyers due to negative rates in other parts of the world and liquidity in the U.S. markets. The 10-year yield shot to 1.59% after the Fed news, but was back down at 1.5% Thursday afternoon. Yields move opposite price.
Commodities-related stocks, like energy names and materials shares, were down sharply Thursday afternoon. Energy was the worst-performing S&P 500 sector, falling 3.5%. Materials lost 2.2%.
“It’s a massive flattening of the yield curve. It’s an interest rate trade, and it’s the belief the Fed is going to slow growth,” Boockvar said. “So sell commodities, sell cyclicals… and in a slow growing economy people want to buy growth. It’s all happening in two days. It’s just a lot of rewinds.”
Boockvar said the curve flattening has been happening swiftly, too. For instance, the spread between the 5-year yield and 30-year bond yield quickly compressed, moving from 140 basis points to 118 basis points within two days.
“You’re watching an incredible unwind of positioning in the bond market. I don’t think people thought the Fed would do it,” BlackRock CIO of global fixed income Rick Rieder said.
“We thought the flattening trade was the right move when we saw some of the news out of the Fed. That was something we jumped on pretty quickly. I have to say we’re letting some Treasurys go into this rally,” Rieder told CNBC.
For stock investors, the shift in cyclical stocks goes against a trade that has been popular as the economy reopened. Financial stocks fell on the flatter yield curve, but REITs were slightly higher. Technology stocks rose 1.2%, and health care gained 0.8%.
“The implication is higher stock market volatility, which I think we’re going to have and going to continue to have,” BTIG head of equity and derivatives strategy Julian Emanuel said. “Yesterday changed things. This whole idea of data dependency — the market is going to trade it like crazy, particularly given the fact that the public participation remains very elevated and the stocks the public is most interested in are high multiple growth stocks that have been leading the last several weeks as the bond market remained range bound.”
Even as Powell acknowledged inflation was higher than the Fed expected, the central bank also pressed its message that inflationary pressures could be temporary. The Fed’s boosted its forecast for core inflation to 3% for this year but was at just 2.1% for next year, in its latest projections. Powell used the example of the rise and fall of lumber prices to illustrate his view that inflation will not be long lasting.
But Emanuel said it will be difficult to tell whether inflation is fleeting , and the economy’s emergence from the pandemic has been difficult to predict. “Whether it’s the Fed or paid economists on the sell side, or paid economists on the buy side, the ability to measure what’s going on in the economy is really nothing more than … educated guess work at this point because the statistics are just all over the place,” Emanuel said, adding inflation readings have all been hotter than expected.
He expects the market will trade in a range for now, with the bottom at 4,050 on the S&P 500 and the top at 4,250. The S&P 500 closed at 4,221 on Thursday, down just 1 point. The Dow was of by 0.6% at 33,823, and the Nasdaq rose by 0.9% at 14,161.
The late-July Fed meeting now looms large. That could add even more volatility as investors wait to see if the Fed will provide more details on tapering after that meeting. Many economists expect the Fed to use its annual Jackson Hole symposium in late August as a forum to lay out its plan for the bond program.
The bond purchases, or quantitative easing, were launched last year as a way to provide liquidity to markets during the economic downturn that started last year. The Fed purchases $80 billion in Treasurys and $40 billion in mortgage securities each month. Rieder expects the Fed could slow purchases by $20 billion a month once it starts the tapering. Once the Fed gets to zero, it could then consider when to raise interest rates.
The market expectations for rate hikes have moved forward, and the euro-dollar futures market now sees four rate hikes by the end of 2023, according to Marc Chandler of Bannockburn Global Forex. Prior to the Fed’s announcement Wednesday, futures showed expectations for about 2.5 rate hikes.
Strategist expect some of the Fed reaction is just temporary, and reflects investors who were too far offsides in some positions. “I’m still a commodities bull,” Boockvar said. Commodities had already begun falling ahead of the Fed announcement, after China announced plans to release metals reserves.
“The Fed needed to reign in the inflation story. They did it only very very slightly, but at least they accomplished it, and they’ve squeezed out inflation expectations and they’ve seen a pullback,” he said. “The question is can they through. To raise rates in two years or baby step tapering is not going to do it, but at least for two days they’ve succeeded in calming things down.”
Stock futures dip slightly after Dow’s worst week since October
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