(Bloomberg) — Stocks fell from all-time highs ahead of the Federal Reserve decision and as political uncertainties in Europe drove traders to the safest corners of the market.
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A sense of caution prevailed as investors braced for amplified swings at a time when volatility has been relatively subdued. With the Fed widely expected to hold borrowing costs at a two-decade high on Wednesday, there’s less certainty on officials’ quarterly rate projections, known as the “dot plot.” Hours before that, traders will also get a fresh read on inflation — which is forecast to show prices are cooling, but still running ahead of the central bank’s comfort zone.
“We expect Fed Chair Powell and company to maintain a position that stresses potential rate cuts remain contingent on the committee seeing further progress made on bringing down price pressures,” said Anthony Saglimbene at Ameriprise. “Outside of how this week’s inflation updates come in, trends across consumer and producer prices over recent months have shown mixed progress.”
Meantime, investor demand for haven assets rose as unease over political upheaval in Europe intensified. Traders were focused on speculation that President Emmanuel Macron has been discussing resigning if his party performs poorly in upcoming legislative elections. Macron subsequently said his position won’t be affected.
The biggest moves were in French markets. The yield on 10-year notes jumped as much as 10 basis points to 3.32%, putting them on course for the biggest two-day increase since the early months of the pandemic. The move has widened the spread over equivalent German bonds to the highest since October on a closing basis.
The S&P 500 dropped to around 5,340, led by losses in financial companies. The KBW Bank Index sank 2%, with big names like JPMorgan Chase & Co. and Citigroup Inc. getting hit. All megacaps but Apple Inc. fell — with the iPhone maker rallying to a record.
Treasury 10-year yields dropped two basis points to 4.44% ahead of a $39 billion auction of the bonds. The dollar rose.
Sentiment and positioning indicators signal a possible short-term pullback in stock markets, driven by uncertainty around the outlook for interest rates, according to HSBC strategists, who recommend buying any dips.
“We’d expect any weakness in risk assets to be both short-lived and shallow, and we think this presents a pretty good tactical (re-)entry point,” the team including Duncan Toms and Max Kettner said.
Bank of America Corp. clients were big net buyers of US equities for the first time in six weeks, led by retail investors and hedge funds, according to the firm’s strategists.
Clients bought $1.9 billion of US stocks, with inflows into both single stocks and exchange-traded funds, BofA strategists led by Jill Carey Hall said.
“Despite mixed signals coming from technical indicators, economic data, inflation and global central banks, markets remain biased to the upside,” said Chris Senyek at Wolfe Research. “Investors’ ‘can’t lose’ attitude will persist for the foreseeable future on the belief that either the economic outlook is going to improve, and/or the Fed will cut.”
Bitcoin investors have reason to be particularly alert for potential volatility.
A 30-day correlation between Bitcoin and the US 10-year Treasury yield is at minus 53, one of the most negative readings in data compiled by Bloomberg since 2010. The metric suggests the largest digital asset at present is moving in the opposite direction to the benchmark bond yield to an unusual degree.
Corporate Highlights:
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Shares of cryptocurrency-linked companies sank amid a drop in Bitcoin.
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General Motors Co. authorized a new $6 billion share buyback plan as improving profitability in its primary business and growth in electric vehicles allow the automaker to return cash to investors.
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Eli Lilly & Co.’s drug for Alzheimer’s has benefits that outweigh its risks, US drug regulatory advisers said, bringing the treatment’s long path to the market closer to a successful end.
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Spotify Technology SA will introduce a new, higher-priced premium plan for its most ardent users later this year, according to a person familiar with the plan. Users will be charged at least $5 more per month for access to better audio and new tools for creating playlists and managing their song libraries, said the person.
Key events this week:
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China PPI, CPI, Wednesday
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Germany CPI, Wednesday
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US CPI, Fed rate decision, Wednesday
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G-7 leaders summit, June 13-15
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Eurozone industrial production, Thursday
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US PPI, initial jobless claims, Thursday
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Tesla annual meeting, Thursday
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New York Fed President John Williams moderates a discussion with Treasury Secretary Janet Yellen, Thursday
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Bank of Japan’s monetary policy decision, Friday
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Chicago Fed President Austan Goolsbee speaks, Friday
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US University of Michigan consumer sentiment, Friday
Some of the main moves in markets:
Stocks
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The S&P 500 fell 0.4% as of 10:19 a.m. New York time
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The Nasdaq 100 fell 0.2%
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The Dow Jones Industrial Average fell 0.7%
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The Stoxx Europe 600 fell 0.9%
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The MSCI World Index fell 0.6%
Currencies
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The Bloomberg Dollar Spot Index rose 0.3%
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The euro fell 0.4% to $1.0725
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The British pound fell 0.1% to $1.2716
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The Japanese yen fell 0.1% to 157.23 per dollar
Cryptocurrencies
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Bitcoin fell 4% to $66,852.32
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Ether fell 3.9% to $3,527.21
Bonds
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The yield on 10-year Treasuries declined two basis points to 4.44%
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Germany’s 10-year yield declined four basis points to 2.63%
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Britain’s 10-year yield declined five basis points to 4.27%
Commodities
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West Texas Intermediate crude fell 0.2% to $77.56 a barrel
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Spot gold rose 0.1% to $2,314.26 an ounce
This story was produced with the assistance of Bloomberg Automation.
–With assistance from Andre Janse van Vuuren, Carly Wanna, Sagarika Jaisinghani, Sunil Jagtiani and Jessica Menton.
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