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18.04.2024 06:23 AM
The Fed and global instability: a double blow to American markets

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On Wednesday, the US stock market showed a decline, which is associated with investors' assessment of the Federal Reserve's actions in managing interest rates and the observation of moderate financial results at the start of the reporting season.

The US dollar and Treasury yields weakened, retreating from their highs in months, while gold retreated from record levels. The three main US stock market indices ended the day with losses, with the Nasdaq particularly affected, which suffered losses of 1.15% due to a decline in the value of shares in the technology sector.

As the first quarter reporting season began, travel companies and USB Bank baffled the market by failing to report impressive earnings and interest income figures, respectively.

Travelers shares fell 7.41%, one of the biggest declines in the S&P 500 index and a record loss for the Dow Industrials, after the insurance giant missed analysts' first-quarter earnings estimates.

Prologis and Abbott Laboratories also weighed heavily on the S&P after their quarterly results, with Prologis down 7.19% and Abbott Laboratories down 3.03%, despite hitting quarterly targets but missing full-year guidance.

After two months of gains at the end of 2023 that continued into the start of the current quarter, the stock market has struggled, with the S&P 500 recording its fourth straight decline and heading for its third consecutive weekly loss. This comes as investors are revising their expectations about the timing and extent of a possible Federal Reserve interest rate cut.

At a press conference on Tuesday, Federal Reserve officials, including Chairman Jerome Powell, did not provide clear guidance on the possible timing of rate cuts, emphasizing that monetary policy should remain accommodative for longer.

"The market is under pressure on multiple fronts: Inflation remains above expectations, forecasts for rate cuts are weakening, and geopolitical tensions, especially in the Middle East, are rising," said Anthony Salmbene, chief strategist at Ameriprise Financial in Troy, Michigan.

"This gives traders a reason to pull back and gives markets some breathing room after five months of strong gains," he added.

The Dow Jones Industrial Average (.DJI) lost 45.66 points, down 0.12% at 37,753.31. The S&P 500 Index (.SPX) fell 29.20 points, or 0.58%, to 5,022.21, while the Nasdaq Composite (.IXIC) fell 181.88 points, or 1.15. %, closing at 15,683.37.

The S&P 500's extended four-day selloff was the longest in four months, a similar situation last seen on January 4th.

Federal Reserve Board Chairman Michelle Bowman and Cleveland Federal Reserve Bank President Loretta Mester are scheduled to speak on the same day.

The Fed's latest Beige Book economic report showed economic activity picking up moderately from late February to early April, but companies expressed concerns about a possible slowdown in progress against inflation.

Coming off a start to the year when the market was reacting heavily to the Fed's expected June rate cut, the likelihood of such a 25 basis point cut is now pegged at just 16.8%, and the chance of a July cut at 46%, according to CME's FedWatch Tool .

Losses in equity markets were partially offset by a further fall in U.S. Treasury yields following a successful 20-year bond auction, with the 10-year yield at about 4.59%.

United Airlines (UAL.O) shares jumped 17.45% on better-than-expected quarterly results, boosting the NYSE Arca Airline Index (.XAL) 3.82%. This was the largest daily increase since February 6.

JB Hunt Transport Services (JBHT.O) fell 8.12%, the worst performer on the S&P 500, after the logistics company missed Wall Street's first-quarter estimates.

US Bancorp (USB.N) shares fell 3.61% after the bank cut its interest earnings expectations for the year and reported a 22% decline in first-quarter profit.

Tensions remained high in the Middle East region as difficult ceasefire negotiations in Gaza continued, while the international community awaited Israel's possible response to Iran's missile strike over the weekend.

European share markets rose marginally after sharp losses, helped by impressive financial results from consumer companies, while investors kept a close eye on developments in the Middle East.

Europe's STOXX 600 stock index (.STOXX) was slightly firmer, up 0.06%, while the MSCI global index of shares around the world (.MIWD00000PUS) was down 0.34%.

Shares in emerging markets registered a rise of 0.36%. MSCI's Asia-Pacific ex-Japan index .MIAPJ0000PUS closed up 0.38%, while Japan's Nikkei .N225 lost 1.32%.

U.S. Treasury yields fell, ending last week's selloff that pushed benchmark yields to their highest since November after the Federal Reserve reconsidered the need to cut interest rates.

Prices for benchmark 10-year notes rose to 18/32, pushing yields down to 4.5832% from 4.657% late Tuesday.

Prices for 30-year bonds also increased to 27/32, cutting yields to 4.7012% from 4.757% last week.

The dollar weakened for the first time in six days against a basket of global currencies, retreating from a five-month high as investors settled for a pause in the Federal Reserve's expected rate-cutting cycle.

The dollar index (.DXY) was down 0.28%, while the euro rose 0.5% to $1.067.

The Japanese yen strengthened 0.25% to 154.35 against the US dollar, while the British pound sterling rose 0.22% to trade at $1.2451.

Oil prices came under pressure, falling in response to significant levels of commercial inventories in the United States and expectations of weaker demand in light of weakening economic data from China, allaying concerns about possible supply disruptions due to geopolitical instability.

US WTI crude oil fell 3.13% to $82.69 per barrel, while Brent crude fell 3.03% to close at $87.29 per barrel.

Gold retreated from its previous gains as falling interest rate expectations reduced the appeal of the safe-haven asset.

The price of gold in the spot market decreased by 0.4% to $2,372.38 per ounce.

On the New York Stock Exchange, decliners outnumbered gainers by a ratio of 1.1 to 1. On the Nasdaq, the ratio was 1.54 to 1.

The NYSE recorded 21 new highs and 103 new lows, while the Nasdaq recorded 27 new highs and 240 new lows.

Trading volume on U.S. exchanges reached 10.8 billion shares, slightly below the average of 11.05 billion shares over the past 20 trading days.

Thomas Frank,
Experto analítico de InstaForex
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