Europe Futures, Asia Stocks Drop on Rate Rise Fear: Markets Wrap - Yahoo Finance

(Bloomberg) — Wall Street traders refrained from making any huge bets in the run-up to the highly anticipated minutes of the Federal Reserve’s latest policy gathering — with stocks, bonds and the dollar posting small moves.

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In the aftermath of a selloff that cut half of this year’s rally, the S&P 500 saw a bit of a bounce back. Gains did not come on a straight line, though. Equities saw a lot of choppiness since the opening bell, with the US benchmark trying to hang on to its 50-day moving average. Treasury two-year yields, which are more sensitive to imminent Fed decisions, dropped from the highest since 2007.

As the bulk of the latest repricing in rates has been a result of a ramp-up in Fed bets, the minutes hold the potential to be “pivotal,” according to Ian Lyngen at BMO. He’s very skeptical about bigger hikes at this stage. Evercore’s Krishna Guha says the fact that rates have pushed up sharply — with big moves at longer tenors and associated tightening in wider financial conditions — makes a 50 basis-point boost less likely.

Despite the recent parade of hawkish Fed speakers, Chair Jerome Powell hasn’t really tried to push back against any dovishness or easing in financial conditions. However, since the latest rate decision, both labor and inflation figures have come in hotter-than-expected — making market expectations adjust higher.

It’s as if “the market is doing some of the Fed’s work for it,” Guha said.

Read: Fed Minutes to Show Support Level for Larger Hikes, Higher Peak

US central bankers will publish minutes of their Jan. 31-Feb. 1 gathering at 2 p.m. Washington time.

In the run-up to the Fed’s statement, a Bloomberg survey of economists showed that inflation that’s proving increasingly stubborn will prompt the central bank to raise rates to an even higher peak level and hold them there through the year. Forecasters boosted their projections for the Fed’s preferred inflation gauge for every quarter through the first half of next year.

Aside from the Fed, traders kept an eye on some corporate highlights.

Apple Inc. has a moonshot-style project underway that dates back to the Steve Jobs era: noninvasive and continuous blood glucose monitoring, according to people familiar with the effort. Intel Corp. slashed its dividend payment to the lowest level in 16 years. Investors will also be interested in hearing from one of this year’s top performers in the S&P 500: Nvidia Corp., which is due to report results after the close.

Traders pinned hopes on the earnings season to push the S&P 500 somewhere out of a trading range it’s been stuck in for months. Between JPMorgan Chase & Co.’s results that kicked off the announcement season and Walmart Inc.’s report Tuesday, the S&P 500 added 0.4%. This ties for the smallest earnings-season reaction in either direction since 2018, data compiled by Bloomberg show.

Skepticism

“After a strong start to the year driven by absolute and relative short covering by institutional investors, skepticism over the sustainability of the rally remains elevated, and bears are beginning to wrestle control from the bulls,” said Mark Hackett, chief of investment research at Nationwide. “While institutional investors have been net buyers this year, they remain conservatively positioned and quick to sell, while retail investors continue to aggressively buy equities.”

“This is a similar trend to what we saw through the second half of 2022,” he added.

Another thing traders are taking note is the recent flare-up in equity volatility. And the reason is that after a lengthy subdued period, that may put the S&P 500’s rally to the test. The so-called VIX held near its highest level since mid-December.

“There was some huge upside call buying activity on the VIX in February as traders turned bearish on the resilience of the equity market,” said Aurel’s Gurmit Kapoor.

That’s a stark contrast to data at the end of last month that showed very few were betting against the rally. Shares out on loan, an indication of short-selling interest, stood just below 1% of the S&P 500’s median free float as of Jan. 31, according to figures compiled by S&P Global Market Intelligence.

As the Fed’s most-ambitious policy tightening in decades tests investors’ resolve toward equities, US companies are increasingly relying on buybacks to boost their market valuation.

Companies in the S&P 500 bought back at least $936 billion of shares in 2022, compared with the $565 billion they paid out as dividends, according to estimates by Howard Silverblatt at S&P Dow Jones Indices. That’s the highest amount of buybacks since the turn of the millennium.

Read: US INSIGHT: What Fed Model Tells You That FOMC Minutes Won’t

Geopolitical tensions also simmered on the background.

US President Joe Biden said Russian President Vladimir Putin made a “big mistake” in suspending participation in the New START nuclear treaty, his first direct response to the announcement. Biden made the brief remark Wednesday in Warsaw, ahead of a meeting with a group of eastern-flank NATO allies known as the Bucharest Nine.

Meantime, Putin said he’s waiting for his Chinese counterpart Xi Jinping to visit Russia as he hailed deepening ties with Beijing at talks with China’s top diplomat.

Elsewhere, US natural gas futures have fallen to levels not seen since pandemic-era lockdowns more than two years ago that strangled the economic activity underpinning energy demand.

Key events this week:

Eurozone CPI, Thursday
US GDP, initial jobless claims, Thursday
Atlanta Fed President Raphael Bostic speaks, Thursday
BOJ governor-nominee Kazuo Ueda appears before Japan’s lower house, Friday
US PCE deflator, personal spending, new home sales, University of Michigan consumer sentiment, Friday
Russia’s invasion of Ukraine hits the one-year mark, Friday