Dow Futures Extend Gains on Fed Bets, But Lingering Trade Concerns Cap Sentiment
Frankfurt (June 5) U.S. equity futures extended gains Wednesday, following on from the biggest single-day surge in at least five months yesterday on Wall Street, as investors continue to bet that any trade-related slowdown in the domestic economy will be offset by an interest rate cut from the Federal Reserve.
Asia markets were also boosted by last night's Fed-induced rally, with Japan's Nikkei 225 rising 1.8%, the biggest gain since late March, and cyclical stocks around the region, particularly in China, booking solid, if more more modest gains.
Fed chairman Jerome Powell's comments during an ongoing central bank symposium in Chicago triggered the jump, although investors had been primed from the rally sine Tuesday when his colleague, St. Louis Fed President James Bullard, spoke of a "darken" global trade outlook and hinted at a policy move in response.
"We do not know how or when these issues will be resolved," Powell said of the ongoing trade conflicts with China, Mexico and the European Union. "We are closely monitoring the implications of these developments for the U.S. economic outlook and, as always, we will act as appropriate to sustain the expansion, with a strong labor market and inflation near our symmetric 2% objective."
With the CME Group's FedWatch tool now pricing in a 53% chance of a July rate cut, and at least an 85% probability of another reduction in the key FedFunds rate before the end of the year, investors are returning to risk markets with renewed optimism, even as the outstanding issues of trade, and a corresponding slowdown in global growth, remain unresolved.
Futures contracts tied to the Dow Jones Industrial Average, which surged just over 500 points yesterday, suggest a 165 point opening bell gain today, while contracts linked to the S&P 500 are indicating an 18 point advance higher for the broader benchmark.
Apple Inc. (AAPL - Get Report) shares were a notable pre-market mover, rising 1.6% after CEO Tim Cook told CBS News that he didn't think his company would be targeted by China should the ongoing trade war between Washington and Beijing escalated further into the tech sector.
GameStop Corp. (GME - Get Report) shares, however, plunged after the video game retailer posted weaker-than-expected first quarter sales and scrapped its regular dividend as gaming trends continue to develop online and key console releases are delayed into the second half of the year.
Some of the market's reluctance to add to yesterday's rally may be linked to the opacity of Powell's comments, with many analysts noting that the Fed's twin mandate of price stability and full employment essentially justify its current target rate of between 2.25% and 2.5%.
"We suspect that Mr. Powell and his colleagues dread the thought of being forced to act by a market rollover triggered by the trade war, because they will then have to be prepared to reverse course in the event of a resolution to the disputes," said Ian Shepherdon of Pantheon Macroeconomics.
"Markets won't want to believe that idea, but the logic is remorseless: Policymakers were expecting to keep hiking before the trade war escalated, so if it is settled they will have to revert to their previous position," he added.
European markets, however, booked solid gains in the opening hour of trading with the Stoxx 600 rising 0.5% in Frankfurt as investors reacted to a stronger-than-expected reading of economic activity for the month of May that offset worries about the brewing budget spat between Rome and Brussels and the impact of further European Central Bank easing on the region's financial sector.
"The final eurozone PMI for May came in higher than the flash estimate, indicating the fastest growth for three months, but the overall picture remains one of weak current growth and gloomier prospects for the year ahead," said IHS Markit's chief economist Chris Williamson. "While the service sector has seen business conditions improve compared to late last year, growth remains only modest, in part reflecting a spill-over from the trade-led downturn in the manufacturing sector."
Government bond markets traded with a defensive tenor Wednesday, with investors pricing benchmark 10-year U.S. Treasury bonds at 2.12% and parallel German bund yields at a near-record record low of -0.205%, each suggesting more concern for growth prospects than central bank easing.
Away from equities, global oil prices extended declines Wednesday following a bigger-than-expected buildup in domestic U.S. inventors of 3.545 million barrels last week, according to data from the American Petroleum Institute, and comments from Igor Sechin, the CEO of Russian oil major Rosneft, that suggest his country might not support an extension of OPEC production cuts when the cartel and its allies meet later this month in Vienna.
Brent crude contracts for August delivery, the new global benchmark, were seen 24 cents lower from from their Tuesday close in New York and changing hands at $61.73 per barrel while WTI contracts for the July were marked 53 cents lower at $52.95 per barrel.
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