Oil dropped below $70 a barrel and US regional lenders slumped as the prospect of a recession and worries about financial stability weighed on markets ahead of the Federal Reserve’s rate decision.
(Bloomberg) — Oil dropped below $70 a barrel and US regional lenders slumped as the prospect of a recession and worries about financial stability weighed on markets ahead of the Federal Reserve’s rate decision.
Crude futures fell to the lowest since March in New York. Shares of PacWest Bancorp and Western Alliance Bancorp slid in premarket trading, worsening Tuesday’s rout. Advanced Micro Devices Inc. slipped after issuing a tepid outlook.
Across markets, trading was mixed as investors awaited clues from policymakers on the path of US rates. S&P 500 futures rebounded slightly after Tuesday’s heavy losses, while the dollar weakened. Ten-year Treasuries extended gains from Tuesday amid demand for haven assets. Traders expect the Fed to raise borrowing costs by 25 basis points at today’s meeting, before signaling a pause in its aggressive hiking cycle.
In Europe, stock gains were led by defensive sectors such as consumer products, food and beverage companies, while energy shares dropped.
“Despite contagion spreading across the regional bank space, we expect the Fed to squeeze in a final 25 basis point hike before pausing to assess the impact of the significant and rapid tightening to date,” Mizuho strategists Evelyne Gomez-Liechti and Helen Rodriguez wrote in a note.
Fed officials are caught between stubbornly high inflation and data pointing to an economic downturn, while concerns remain about financial strains stemming from the banking turmoil. Multiple volatility halts in US regional lenders PacWest Bancorp and Western Alliance Bancorp unsettled Wall Street on Tuesday, just a day after JPMorgan Chase & Co.’s acquisition of First Republic Bank had seemed to bolster confidence in the sector.
Adding to the uncertain mood is a lack of clarity regarding the US debt ceiling. Between now and June 1 — the date by which the Treasury Department may run out of sufficient cash — President Joe Biden and members of the House and Senate are scheduled to be in town at the same time for one week to find a solution.
“It is a key event risk in the next few weeks and possibly a month or two,” Aninda Mitra, head of Asia macro and investment strategy at BNY Mellon Investment Management in Singapore, said on Bloomberg Television. “It feeds into our overall defensiveness, which we are advocating in our asset allocation recommendations to be long fixed income in this kind of an environment and underweight equities.”
Elsewhere, a gauge of Asian shares fell, catching up with overnight moves on Wall Street. Markets are shut in Japan and mainland China for holidays, and there’s no trading of cash Treasuries in Asia hours.
Key events this week:
- US ADP employment, S&P Global US services PMI, US ISM services, Wednesday
- Fed Chair Jerome Powell holds news conference following rate decision, Wednesday
- US initial jobless claims, trade balance, Thursday
- European Central Bank rate decision, followed by ECB President Christine Lagarde’s news conference, Thursday
- US unemployment, nonfarm payrolls, Friday
Some of the main moves in markets:
Stocks
- S&P 500 futures rose 0.2% as of 6:23 a.m. New York time
- Nasdaq 100 futures rose 0.2%
- Futures on the Dow Jones Industrial Average rose 0.1%
- The Stoxx Europe 600 rose 0.5%
- The MSCI World index rose 0.1%
Currencies
- The Bloomberg Dollar Spot Index fell 0.2%
- The euro rose 0.3% to $1.1033
- The British pound rose 0.3% to $1.2510
- The Japanese yen rose 0.6% to 135.71 per dollar
Cryptocurrencies
- Bitcoin fell 0.1% to $28,665.14
- Ether fell 0.1% to $1,868.25
Bonds
- The yield on 10-year Treasuries declined two basis points to 3.41%
- Germany’s 10-year yield declined two basis points to 2.24%
- Britain’s 10-year yield declined one basis point to 3.66%
Commodities
- West Texas Intermediate crude fell 2.4% to $69.97 a barrel
- Gold futures were little changed
This story was produced with the assistance of Bloomberg Automation.
–With assistance from Richard Henderson and Cecile Gutscher.
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