Wednesday Roundup: Markets tumble again on profit taking and Fed’s reaction to rising prices

by Market Updates and Alerts

Downswing prevails among US index futures and European exchanges; After Powell’s tough speech yesterday, investors ponder the magnitude of new US interest rate hikes

Following yesterday’s strong rise in stocks on both sides of the Atlantic, investors today are taking the opportunity to pocket part of the gains. Conjectures about the weight of the Federal Reserve’s (Fed) hand in increasing the cost of money – and its effect on the behavior of the US economy – also make markets reticent.

Contracts indexed to the main US stock indices fell today, partially erasing yesterday’s jump when the S&P 500 rose no less than 2% and the Nasdaq Composite, by 2.76%. In the sovereign bond market, investors are demanding higher premiums for bonds in all countries, in response to the tightening cycle inaugurated by many central banks. WTI-type oil is above US$ 114 per barrel.

In Europe, the London-based FTSE tried to rise but soon returned to negative territory, where the Stoxx 600 was also found. ABN Amro even dropped by almost 10% after the Dutch lender reported a cost increase in the first quarter. The energy sector, in turn, contributed gains: Siemens Gamesa Renewable Energy, for example, rose on news that Siemens Energy AG could buy the shares it does not own in its Spanish wind turbine manufacturing unit.

Risk sentiment is proving fragile amid tighter monetary scenarios, Russia’s war in Ukraine, and lockdowns over Covid-19 outbreaks in China. In the background of the markets is, above all, inflation and the consequent response of the Fed in raising interest rates.

Whatever it takes?

Yesterday, Fed Chair Jerome Powell delivered a very tough speech and again said that the Fed will “continue to act” until the pressure on prices drops “clearly and convincingly”. No one, according to him, should doubt the monetary authority’s determination to contain the highest inflation in 40 years. The message that will continue to echo on the trading desks is that the Fed will spare no efforts to raise interest rates above, even, the neutrality level, which could affect the pace of economic expansion.

Inflation on the radar

On the agenda of the day, inflation data in Europe can give an idea of what the European Central Bank (ECB) intends for its next monetary policy meeting. Tomorrow the minutes of the ECB and, in the US, the Index of Leading Indicators will be published – any sign of an economic slowdown on the front could strain markets.

A not so encouraging morning

UK inflation rose to its highest level in 40 years (+9% in the year to April) when Margaret Thatcher was prime minister. The latest macroeconomic data in Europe is far from encouraging. New vehicle sales fell for the tenth straight month (-20% in April, the worst decline of the year), dragged down by consumer mistrust and the crisis in supply chains.

Tuesday’s numbers

Dow Jones (+1,34%), S&P 500 (+2,02%), Nasdaq Composite (+2,76%), Stoxx 600 (+1,22%), Ibovespa (+0,51%)

Stocks on Wall Street advanced on the decline in Covid-19 cases in China and the favorable performance of US retail sales. Investors also weighed in on comments from Fed Chairman Jerome Powell, who insisted he would not hesitate to raise rates above their neutral levels to curb inflation. Walmart was the downside of the day – in response to lowering its earnings forecasts, its stock posted its worst intraday drop since 1987.

What to watch for

  • USA: Interest and MBA Mortgage Applications; MBA Purchasing Index; Construction Permits/Apr; Construction of New Houses/Apr; Crude Oil Inventories; Activity of Oil Refineries – EIA
  • Europe: Eurozone (IPC/Apr); Germany (Current Transaction Balance/Sea; Vehicle Licensing/Apr); France (Vehicle Licensing/Apr); United Kingdom (IPC/Abr; IPP/Abr; Retail Price Index – RPI/Abr; Vehicle Licensing/Apr)
  • Asia: Japan (Industrial Production/Sea; Installed Capacity Utilization/Sea; Machinery Orders Core/Sea; Trade Balance/Apr)
  • Latin America: Brazil (Foreign Exchange Flow); Chile (GDP/1Q22)
  • Central banks: ECB non-monetary policy meeting. ECB Financial Stability Analysis. Speeches by Andrea Enria and Elizabeth MacCaul (BCE) and Burkhard Balz (Bundesbank)
  • Balance sheets: SQM, Tencent, Cisco, Lowe’s, Target, TJX