US stock indices paused their impressive rally on Tuesday, as energy stocks led losses on speculation that Chesapeake Energy plans bankruptcy and the idea that other gas and energy companies could go down the same road as a result of severely distressed level of debt amid last months’ historical decline in oil prices. Capital flew into FAANG and technology stocks. The Dow erased 1.09%, the S&P500 retreated 0.78%, as Nasdaq gained 0.29%.
US treasuries rose, the 10-year yield fell to 0.82% ahead of the Federal Reserve (Fed) decision, but the US dollar extended losses in the continuation of the longest losing streak since 2006.
Gold extended gains to $1718 per oz, the USDJPY fell below 108 and the USDCHF slipped below 0.95 on the back of a swift move to safety on concerns that a deeper downside correction in US equities could be just around the corner, but not all cards are played yet. Now all eyes are on the FOMC decision.
The Fed is expected to maintain its interest rate and asset purchases policy unchanged at this month’s meeting. Would be important to investors if there is any shift in Fed’s position after the latest jump in the jobs report.
We believe that a single data point is too little to drive conclusions regarding the strength of the post-Covid recovery, even more so as the data remains highly volatile and unpredictable. Therefore, we expect the Fed to remain cold-headed in the wake of the latest jobs report and maintain a highly recovery-friendly strategy to cement the latest rise across the equity markets, especially given that the upcoming economic figures could reveal some shocking numbers including an above 30% slump in the second quarter GDP. And the Fed has margin to do so as the core inflation in May is expected to have retreated to 1.3% year-on-year and the headline inflation is seen near zero as a result of the heavy Covid crisis.
Therefore, a supportive policy stance from the Fed could give a renewed boost to a mostly self-nurturing equity rally and send the US dollar to weaker levels. If, however the Fed shifts to a more orthodox tone, which we doubt, the equity rally would be dented.
Stocks in Asia were mixed. Appetite in Japanese stocks (-0.07%) remained limited on stronger yen, Shanghai’s Composite fell 0.50% although softer consumer and producer prices in China offered a stronger case for an extended monetary support. The Hang Seng (+0.10%) and the ASX 200 (+0.42%) recorded timid gains.
European indices are preparing to open flat-to-positive following a bearish session on Tuesday. The DAX lost 1.55% while bank and energy stocks drove the FTSE 2.11% down.
By Ipek Ozkardeskaya
