Stockbrokers sell the news after Fed makes big move: Markets Wrap

(Bloomberg) — A rally that had briefly pushed stocks to all-time highs hit a wall when the Federal Reserve signaled it was in no hurry to ease monetary policy after cutting interest rates by half a percentage point.

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The S&P 500 gave up a 1% gain as Jerome Powell warned against expecting a continuation of sharp rate cuts. While that's not necessarily a bad thing, as aggressive easing is usually associated with economic stress, traders ended up driving stocks to a session low by 4 p.m. in New York.

“After a rally ahead of today's Fed announcement, it would not be unreasonable for the market to pull back a bit,” said eToro's Bret Kenwell. “However, the long-term outlook remains promising. As long as the economy holds up and inflation does not flare up again, lower interest rates and strong earnings growth can continue to drive stock prices higher over the long term.”

For Ian Lyngen and Vail Hartman of BMO Capital Markets, Powell's press conference was emblematic of the magnitude of the rate cut and made it clear that policymakers are not particularly worried about any aspect of the real economy at the moment.

“It is impressive that despite the classic 'buy the rumor, sell the fact' dynamic of the 50 basis point cut, selling still occurred. Positions are being balanced out and the market is returning to the mode of trading the upcoming economic data with an eye on the potential impact of the presidential election campaign.”

The S&P 500 fell 0.3 percent. The Nasdaq 100 lost 0.5 percent. The Dow Jones Industrial Average lost 0.2 percent. An index for the “Magnificent Seven” of megacaps slipped 0.1 percent. The Russell 2000 of small companies remained little changed.

Yields on 10-year US government bonds rose six basis points to 3.7 percent. The dollar rose.

Looking at the market reaction to a half-percentage point cut ahead of the meeting, some expected a positive reaction as it would be good for the economy, while others expected a decline along the lines of “what do they know that we don't know,” said Nationwide's Mark Hackett.

“The lack of a directional change was the least likely outcome, but it's what we got,” Hackett said. “The S&P 500 is having a hard time breaking through the July record high, and the more failed breakouts we see, the harder it will be to achieve one.”

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For Chris Larkin of E*Trade at Morgan Stanley, the markets got what they wanted – a first significant interest rate cut by the Fed.

“The Fed has a well-earned reputation for not wanting to rush things, so there is the potential for some disappointment if it turns out to be too slow, especially if economic data continues to weaken. But today it delivered,” he added.

The market now shows a total of about 70 basis points worth of cuts for the remaining two meetings this year. The Fed's projections – known as the dot plot – show that a narrow majority favor cutting rates by at least another half a percentage point in 2024. According to their median forecast, policymakers have planned another percentage point of cuts for 2025.

“It's now going to be a battle between market expectations and the Fed, with employment data – not inflation data – deciding which side is right,” said Jack McIntyre of Brandywine Global. “Now everyone is back to being data dependent.”

Jamie Cox of Harris Financial Group remains skeptical about the extent of expected rate cuts next year, as crises tend to bring deeper cuts.

“We expect tailwinds for traditional beneficiaries, including small caps, value and cyclical sectors, and the equally weighted S&P 500 index,” he noted.

For Evercore's Krishna Guha, the big step out of the starting blocks provides some protection for a soft landing, is risky and should particularly benefit risky, cycle-oriented investments such as small caps, cyclicals, commodities and commodity currencies.

“Despite skepticism about the economic need for an aggressive 50 basis point cut, markets can and should only celebrate today's move – and will continue to do so in the months ahead,” said Seema Shah of Principal Asset Management. “We have a Fed that will go to historic lengths to avoid a hard landing. Recession, what recession?”

“Don't be scared off by the thought of rate cuts,” said eToro's Callie Cox. “The Fed is cutting rates to celebrate controlled inflation, not out of desperation. Don't give up on the stock market. We think there's still a chance the Fed will save the labor market – and therefore the economy – with lower rates. And when that happens, the biggest – and most expensive – risk is missing out on an eventual rally led by the unsympathetic parts of the market.”

Company highlights:

• A U.S. security panel has given Nippon Steel Corp. permission to resubmit its plans to acquire United States Steel Corp. for $14.1 billion, likely postponing a decision on the politically controversial takeover until after the U.S. elections in November, people familiar with the matter said.

• Google has won a legal battle with the European Union over a 1.5 billion euro ($1.7 billion) fine for hindering competition in online advertising, partially making up for last week's crushing defeat in another ruling for abusing its monopoly position.

• Qualcomm Inc. has lost a legal battle before the European Court of Justice over a multi-million euro fine. The US company was accused of setting the price of certain chips so low that it was able to force a smaller competitor out of the market.

• T-Mobile US Inc. on Wednesday outlined its growth ambitions for the next three years, forecasting higher profits due to increasing customer numbers and the use of new technologies, including artificial intelligence.

• A union official said Elliott Investment Management is still interested in replacing Southwest Airlines CEO Bob Jordan, suggesting that changes the airline has already promised are not enough to satisfy the activist shareholder.

• Anne Wojcicki, co-founder and chief executive officer of 23andMe Holding Co., told employees that she remains committed to privatizing the genetic testing company even after the independent board members resigned.

Important events this week:

• Interest rate decision UK, Thursday

• US Conf. Board's leading index, initial jobless claims, existing home sales, Thursday

• FedEx results, Thursday

• Japan’s interest rate decision, Friday

• Consumer confidence in the Eurozone, Friday

Some of the key market movements:

Shares

• The S&P 500 fell 0.3% at 4 p.m. New York time

• The Nasdaq 100 fell 0.5%

• The Dow Jones Industrial Average fell 0.2 percent

• The MSCI World Index fell by 0.4 percent

• Bloomberg Magnificent 7 Total Return Index fell 0.1%

• The Russell 2000 Index remained barely unchanged

Currencies

• The Bloomberg Dollar Spot Index rose 0.1%

• The euro was little changed at 1.1105 dollars

• The British pound rose 0.2% to $1.3187.

• The Japanese yen remained virtually unchanged at 142.46 per dollar.

Cryptocurrencies

• Bitcoin fell 0.1% to $60,055.19

• Ether fell 1.3% to $2,314.6.

Bonds

• The yield on 10-year government bonds rose six basis points to 3.7%

• The yield on German 10-year bonds rose by five basis points to 2.19 percent

• The yield on British 10-year bonds rose eight basis points to 3.85 percent

Raw materials

• West Texas Intermediate crude oil fell 1.7 percent to $70.01 a barrel

• The spot price of gold fell 0.8 percent to $2,549.44 per ounce.

This story was created with the assistance of Bloomberg Automation.

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