S&P 500 futures little changed, reversing a modest drop earlier in the session, and were set for a muted open on Wednesday after two days of gains, with investors awaiting the "most important Federal Reserve rate decision of 2023" and as recent turmoil in the global banking sector subsided. Futures contracts on the S&P 500 were up 0.1% by 7:30 a.m. ET while Nasdaq 100 futures were flat. Both underlying indexes have gained for two consecutive sessions. European stocks fluctuated in a narrow range and Treasury yields were unchanged after a surge on Tuesday that added 19 basis points to the two-year maturity. The dollar dropped for a 5th straight day, its longest losing streak since April 2021, while the pound strengthened after a surprise jump in UK inflation which came above all expectations.
Among notable movers in US premarket trading, GameStop surged after reporting a surprise fourth quarter adjusted profit, lifting other meme stocks including AMC and Bed Bath & Beyond. Shares in First Republic Bank reversed all afterhous losses and edged higher as Wall Street leaders and US officials are exploring the possibility of government backing to encourage a deal that would shore up the lender. Here are some other notable premarket movers:
US stocks rebounded this week after investors were rocked by the collapse of several lenders earlier in the month, spurring fears about the health of the financial system and the negative impact from higher rates on the economy. Government and monetary intervention managed to restore some calm this week, with the S&P 500 benchmark erasing monthly losses on Tuesday. The S&P Banks Index also rebounded, but is still down 18% this month. Technical indicators also showed positive signs, with MACD momentum improving for both the S&P 500 index and the Dow Jones, while being firmly in positive territory for the Nasdaq 100.
That said, confidence is extremely fragile, with all eyes are now on the Fed for clues about the path of interest rates going forward. As explained, the "trapped" Fed’s next move will reveal whether the fight against inflation trumps fears of financial instability from the banking fallout in recent weeks, and vice versa. Consensus is for a 25-bp hike and swaps markets now signal 80% odds on that after market pricing was split between a hike and a pause earlier in the week, but some voices urge a pause after the banking turmoil. One economist said the “tension is leading to existential angst.” Our full FOMC preview is here.
“If the Fed raises by 50 basis points, it will come as a huge surprise and the market won’t like it,” said Roger Lee, head of UK equities at Investec Bank Plc. “But ironically, if they don’t raise at all, the market will get concerned about that too, as it will pose questions about what the Fed is seeing that the market isn’t.” Well, one thing the Fed could be seeing is all the bank failures that nobody - neither the Fed, nor the market - was seeing as recently as two weeks ago. So it's not clear they need to so anything more.
“In the run-up to today’s US interest rate decision, most market participants will be more cautious,” said Comdirect Bank strategist Andreas Lipkow. “In the current situation, it doesn’t take much to create high levels of volatility on the financial markets. On the one hand, investors are nervous, but at the same time don’t want to miss any further upside performance. The FOMO effect was already clearly visible yesterday.”
European stocks also advanced, with the Stoxx 600 adding 0.3% and on course for a third consecutive gain as banks stocks outperform. UK inflation accelerated unexpectedly in February, cementing expectations that the Bank of England will deliver another 25bps hike on Thursday. UK two-year yields have jumped ~17bps while the British pound raced to the top of the G-10 pile, rising 0.6% versus the greenback. Here are some of the most notable European movers:
UBS has erased almost all of its share losses suffered during the rout. It offered to buy back €2.75 billion ($3 billion) of bail-in notes it sold on Friday, two days before snapping up Credit Suisse, citing a “prudent assessment” of exceptional developments.
Earlier in the session, Asian stocks gained, with a gauge of the region’s financial shares headed for its biggest advance in more than two months, as concerns over a global banking crisis abated and focus turned to the Federal Reserve’s rate decision. The MSCI Asia Pacific Index climbed as much as 1.6% as firms including Mitsubishi UFJ Financial Group and Commonwealth Bank of Australia jumped. Hong Kong’s equity benchmark was among the top gainers in Asia, boosted by tech names, while Japan’s gauges also rose in catch-up trade. Sentiment improved following authorities’ assurances including comments from Treasury Secretary Janet Yellen, who said the US government could intervene if the stability of smaller lenders are threatened. Asian investors are now focused on the Fed’s decision as they assess the outlook for international money flows, with most of the region’s emerging markets seeing foreign funds turn net sellers this month.
“The focus for the upcoming Fed will clearly have to address the current financial stability concerns while pretending to stay on message on inflation considerations,” Saxo Capital Markets strategists wrote in a note. Investors should consider how the Fed “positions its level of concern around recent events and the risk of a funding crisis in the banking system,” they added. Read: Yellen Says US Will Intervene If Needed to Protect Smaller Banks The Hang Seng gained 1.7%, paring this month’s loss in the wake of the collapse of three US regional banks and the takeover of Switzerland’s Credit Suisse Group AG. Japan’s Nikkei 225 climbed 1.9%, the biggest jump since Jan. 18 after investors returned from a national holiday.
Japanese stocks also rose in catch-up trade as traders returned from a national holiday, buying shares ahead of the Federal Reserve’s policy decision. The Topix Index gained 1.7% to 1,962.93 as of market close Tokyo time, while the Nikkei advanced 1.9% to 27,466.61. Keyence Corp. contributed the most to the Topix Index gain, increasing 4.2%. Out of 2,159 stocks in the index, 2,000 rose and 126 fell, while 33 were unchanged. Shares rose across Asia, tracking US gains, as concerns over financial stability eased amid assurances from authorities including Treasury Secretary Janet Yellen. Expectations for Fed’s rate hikes have declined over the last two weeks in the wake of the collapse of three US regional banks and the takeover of Switzerland’s Credit Suisse Group AG. “Yellen’s comments and the ECB policy on AT1 bonds may have calmed investors,” said Hideyuki Suzuki, general manager at SBI Securities
Australian stock gained: the S&P/ASX 200 index rose 0.9% to close at 7,015.60, in a broad rally supported by energy stocks and banks. Lenders continued to reclaim recent losses as fears over the financial sector ease, ahead of the Federal Reserve’s much-anticipated interest-rate decision later Wednesday. Traders placed greater odds that the Fed will raise interest rates 25 basis points after market pricing was split between a hike and a pause earlier in the week. In New Zealand, the S&P/NZX 50 index rose 0.5% to 11,586.93
Key stocks gauges in India rose on Wednesday, tracking a risk-on trade across most Asian markets, ahead of the Federal Reserve’s rate decision later on Wednesday. The S&P BSE Sensex Index rose 0.2% to 58,214.59 in Mumbai, while the NSE Nifty 50 Index advanced 0.3% as the gauges rose for the fourth session in five. ICICI Bank contributed the most to the Sensex’s gain, increasing 0.9%. Out of 30 stocks in the index, 18 rose and 11 fell, while one was little changed.
In FX, the pound extended gains as traders firmed up bets on a quarter-point hike on Thursday, while UK bonds fell. A Bloomberg index of dollar strength retreated. The BBDXY headed for a fifth day of losses, the longest losing streak since April 2021, but as long as 55-DMA supports holds, topside risks remain intact; on the weekly, the gauge is struggling to stay within the cloud given the bearish MA crossover and RSI divergence
In rates, treasuries were steady, yields within a couple of basis points of Tuesday’s closing levels with the belly outperforming, steepening 5s30s and unwinding a portion of Tuesday’s sharp flattening move. US 10-year yields steady around 3.60%, slightly richer on the day with bunds and gilts lagging by additional 6bp and 11bp in the sector; UK curve aggressively bear-flattens with 2-year yields cheaper by ~20bp on the day following hot February CPI numbers. Bunds underperform, following wider losses in gilts during London hours after UK inflation increased unexpectedly. US session includes Fed rate decision and updated economic projections at 2pm New York time and Chair Powell news conference at 2:30pm.
In commodities, crude futures declined with WTI down 0.4% to trade near $69.40. Spot gold rises 0.3% to around $1,945
Looking to the day ahead now, and the main highlight will be the Federal Reserve’s policy decision along with Chair Powell’s press conference. Other central bank speakers include ECB President Lagarde, and the ECB’s Villeroy, Lane, Rehn, Wunsch, Panetta and Nagel. Otherwise, data releases include the UK CPI release for February.
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Asia-Pac stocks sustained the momentum from Wall St where the major indices rallied for a second consecutive day. ASX 200 was firmer as energy and the consumer sectors spearheaded the advances in the index which climbed back above the psychological 7,000 level. Nikkei 225 was boosted as it played catch-up on its return from holiday amid notable strength in the banking industry and with Japan set to allocate more than JPY 2tln from reserves for measures to cushion the blow to the economy from rising prices. Hang Seng and Shanghai Comp. conformed to the upbeat mood with initial outperformance in Hong Kong, while the advances in the mainland were limited after the PBoC’s liquidity drain and with with reports yesterday suggesting the US is seeking to prevent China from benefitting from its USD 52bln chip funding.
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European bourses are mostly in the green, Euro Stoxx 50 +0.3%, as the constructive APAC tone continues though benchmarks are confined to pre-FOMC ranges. Upside with the exception of the FTSE 100 -0.2% following hot UK CPI and a subsequent hawkish shift in pricing for Thursday's BoE; 25bp now priced, ~10% chance of 50bp implied. Sectors are mixed with Banking names outperforming once again while defensively-biased sectors are lagging and incrementally softer. Stateside, futures are confined to narrow pre-FOMC parameters and are little changed/slightly softer, ES -0.1%
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DB's Jim Reid concludes the overnight wrap
Markets put in another broadly positive performance over the last 24 hours, which makes it the first time since SVB’s collapse that we’ve had two decent sessions in a row. We’ll have to see if this is maintained, and there’ve certainly been false dawns before, but yesterday saw several milestones that added to the optimistic mood. Among others, bank stocks experienced their best performance so far this year, the VIX index of volatility fell to its lowest level since the current turmoil began, and the S&P 500 closed above its level on March 8 before worries about SVB surfaced in markets more broadly. We also saw another day of historic rates moves, with the 2yr German yield seeing its largest daily gain since 2008, at +25.6bps.
This more positive market sentiment has led to growing confidence that the Fed will follow through with a +25bp hike today, and futures are pricing in a roughly 82% chance they’ll go ahead with one. As the Fed come to that decision, it’s fair to say that had their discussions been on any of the last 8 business days, the tone could have been very different. Indeed, expectations of their decision today have bounced around considerably. Before the SVB collapse, Chair Powell had said in congressional testimony that they were “prepared to increase the pace of rate hikes”, which led investors to price in a strong chance of a 50bps move. But little more than a week later, after SVB had collapsed and with major concerns about Credit Suisse, just a 7.9bp hike was expected, signalling that markets were pricing in a pause as the most likely outcome. Since that low point however, more stable markets have led to a recovery in pricing, with a 20.6bps hike priced as we go to press this morning.
There’ll be plenty of focus on whether the Fed hike today, but just as important will be how they’re looking at the current turmoil and whether they still expect any more rate hikes after today. In their preview (link here), our US economists think that the ECB’s decision last week offers a relevant blueprint for the Fed: raise rates in line with expectations, drop forward guidance, but signal a continued tightening bias. As such they think the Summary of Economic Projections will be little changed from December, when it showed officials thought the Fed funds rate would be at 5.1% by year-end.
Ahead of all that, bank stocks put in a strong recovery yesterday as investor optimism grew that we might be past the worst. For instance, both Europe’s STOXX Banks index (+4.79%) and the US KBW Bank index (+4.95%) saw their best daily performances of 2023 so far. One factor helping sentiment were comments from US Treasury Secretary Yellen, who said that “similar actions could be warranted if smaller institutions suffer deposit runs that pose the risk of contagion”. That supported significant gains among several banks, including UBS (+12.12%) which posted its largest advance since March 2020. Furthermore, First Republic (+29.47%) witnessed a major rebound following its -90% decline over the previous two weeks, though intraday it was nearly 60% higher. On First Republic, the lender remains the source of continued concern for both major Wall Street banks and Washington DC. Last night, Bloomberg reported that CEOs of major US banks and lawmakers remain in talks to ensure there is not further contagion risk as well as discussing what would make the bank more attractive to potential investors or outright buyers. And speaking of banks, Marion Laboure on our team has published a report this morning (link here) discussing the events of the last couple of weeks, which also looks at how Bitcoin has reached its highest level since June and points out the recent weakening in the correlation between US equities and crypto.
This strength among bank stocks helped lead a broader equity rally yesterday, and the S&P 500 ended the day up +1.30% to surpass its level on March 8. That’s the first time in the last couple of weeks that the S&P has recorded back-to-back advances, and as it happens it’s also the index’s best start to a week so far this year. The more cyclical sectors helped power the rally, while the only sectors that lagged were defensives such as utilities (-2.05%) and consumer staples (-0.12%). The rise in cyclicals and growth-oriented stocks led the NASDAQ (+1.56%), the FANG+ index (+2.30%) and the small-cap Russell 2000 (1.88%) to outperform. This matched the tone in Europe, where the STOXX 600 was up +1.33% for the day.
The prospect of steadier market conditions meant that bond yields bounced back again yesterday. Indeed, the 10yr Treasury yield finished at its highs of the day, up +12.5bps to 3.609%, leaving it over +32bps above its intraday low on Monday morning. A big factor behind that has been the perception the Fed won’t need to cut rates as aggressively as anticipated only a few days ago, with the rate priced in for the December meeting up by a significant +31.5bps yesterday to 4.365%. Bear in mind that only a week ago we had over 100bps of rate cuts priced in for this year, and that’s now down to around “only” 60bps of cuts by year-end. This morning we’ve seen just slight tick down in yields again, with those 10yr Treasuries - 1.9bps lower at 3.59% as we go to print.
Over in Europe it was much the same story yesterday, with yields on 10yr bunds (+16.7bps), OATs (+14.3bps) and BTPs (+12.8bps) all recovering from their recent declines. That was even more pronounced at the front-end of the curve, with the 2yr German yield (+25.6bps) seeing its largest daily gain since September 2008. As in the US, that came amidst a re-evaluation of the ECB’s policy trajectory, with another 25bp hike being priced in for the year ahead over the course of the day. This upbeat tone has been echoed by Asian equity markets overnight. All the major indices are in positive territory, including the Nikkei (+2.08%), the Hang Seng (+1.85%), the KOSPI (+1.07%), the CSI 300 (+0.16%) and the Shanghai Composite (+0.11%). And futures are suggesting that will continue later on, with those on the Euro STOXX 50 up +0.29%, whilst those on the S&P 500 are up +0.06%. There were also signs of a declining global risk premium in FX markets, since the US Dollar index has fallen to its lowest level since February 3 this morning, having benefited from the flight into haven assets over recent days.
Looking at yesterday’s data, we had US existing home sales for February, which showed an unexpectedly large increase to an annualised rate of 4.58m (vs. 4.2m expected), marking their highest level in 5 months. Otherwise, the German ZEW survey for March was a bit weaker than expected, with the expectations component falling to 13.0 (vs. 15.0 expected). That’s the first decline in the expectations component after 5 consecutive monthly gains. Finally, Canada’s CPI fell to +5.2% in February (vs. +5.4% expected), which is the slowest year-on-year growth in the headline rate since January 2022.
To the day ahead now, and the main highlight will be the Federal Reserve’s policy decision along with Chair Powell’s press conference. Other central bank speakers include ECB President Lagarde, and the ECB’s Villeroy, Lane, Rehn, Wunsch, Panetta and Nagel. Otherwise, data releases include the UK CPI release for February.