Stock futures stuck near two-week lows as Fed fears reverberate

U.S. stock futures hovered near two-week lows on Wednesday as uncertainty over the rajectory of Federal Reserve policy continued to hobble traders’ risk appetite.

How are stock-index futures trading
  • S&P 500 futures

    dipped 3 points, or 0.1% to 4126

  • Dow Jones Industrial Average futures

    fell 37 points, or 0.1% to 32864

  • Nasdaq 100 futures

    eased 13 points, or 0.1% to 12883

On Tuesday, the Dow Jones Industrial Average

fell 154 points, or 0.47%, to 32910, the S&P 500

declined 9 points, or 0.22%, to 4129, and the Nasdaq Composite

dropped 0.3 points, or 0%, to 12381. The S&P 500 was up 12.6% from its mid-June low but remains down 13.4% for the year to date.

What’s driving markets

Fed fretting was again smothering stock markets on Wednesday. Since hitting a near four-month high on August 16th, the S&P 500 has swiftly retreated 4.1% as investors feared their optimism that the Fed would slow its pace of rate hikes was misplaced.

“The reset of expectations has put the skids under what had been something of a recovery rally for the major indices, which remain well short of their opening 2022 levels,” said Richard Hunter, head of markets at Interactive Investor, in a morning note.

Comments late on Tuesday from Minneapolis Fed President Neel Kashkari reinforced concerns that the central bank was not minded to pivot to a more dovish trajectory anytime soon, despite signs headline inflation may have peaked and amid a rash of downbeat economic data this week.

“The changing narrative among investors is that even if the Fed succeeds in engineering a soft landing for the U.S. economy, rates could remain at elevated levels for longer, and until such time as the battle with inflation has been beaten beyond a doubt,” Hunter added.

The shift in Fed policy expectations have pushed up benchmark borrowing costs and helped force the ICE Dollar Index

to fresh 20-year highs — both trends are often deemed damaging to U.S. equity valuations. Record high energy costs in Europe, which have raised fears of a recession in Germany, has also weighed on sentiment.

Still, equity derivative analysts at Bank of America reckon that the recent summer rally in stocks and bonds, which saw the S&P 500

climb 17% off its mid-June trough and the 10-year Treasury yield

fall to 2.5%, has itself encouraged Fed chair Jay Powell and colleagues to be more hawkish.

“Giving them [the Fed] room to hike are financial conditions, which by some measures are near as loose as they’ve been during this hiking cycle. This is not new; it’s the “Fed call” dynamic we’ve been writing about all year (the Fed has implicitly sold a call on the market), where looser financial conditions require and allow the Fed to act more aggressively against inflation,” said BofA in a note.

“We think the current set-up creates a risk that the Fed hikes aggressively next month, and that Powell may try to point the market that way at Jackson Hole. Equities, in particular, may have more to lose as they have been the largest driver in the recent easing of financial conditions,” the BofA strategists concluded.

Fed chair Jay Powell is due to make a speech on Friday at the Jackson Hole symposium.

U.S. economic data on the slate for Wednesday include the July durable goods report, due 8:30 am Eastern, and the July pending home sales at 10 am Eastern.

And after the closing bel,l the market will receive earnings updates from a trio of once high-flying technology stocks: Nvidia

and Snowflake

Meanwhile, the saga of meme-stock favorite Bed Bath & Beyond

took another twist after the Wall Street Journal reported the struggling retailer had lined up a financing source to shore up its liquidity.

How are other assets faring
  • Oil futures were higher with U.S. crude

    adding 0.7% to $94.36 a barrel, ahead of the U.S. weekly energy inventory data due at 10:30 am Eastern.

  • The 10-year Treasury yield

    dipped less than 1 basis point to 3.044% and German 10-year bund yields

    rose 3 basis points to 1.35%.

  • Gold

    dipped 0.1% to $1,760 an ounce.

  • Bitcoin

    fell 0.7% to $21352.

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