Opening Bell: Fed Rate Cut Talk Sparks Global Stock Surge, Banks Rally

 | Jun 05, 2019 06:36AM ET

  • Futures climb with Europe, Asia on rate cut signals from Fed, Mexico confidence in deal with U.S.
  • Yields rebound, U.S. majors leap the most since January on reassurance from Powell, Clarida
  • Financials seal biggest gains, Real Estate lags despite falling rates outlook
    • h2 Key Events/h2

    Global Stocks and futures on the S&P 500, Dow and NASDAQ 100 tracked Wall Street’s biggest jump since January this morning, after Federal Reserve Chairman Jerome Powell suggested a potential interest rate cute and Mexico expressed confidence in reaching an agreement with the U.S. that would stave off trade tariffs.

    After opening lower—and thereby showing signs that a rebound from the worst selloff of the year may be fading—Europe's STOXX 600 quickly bounced back alongside travel companies and technology firms, in line with U.S. futures's quick reversal. While no one can predict what new headlines are in store for us today, we can expect volatility, reflecting investors’ frayed nerves.

    In the earlier Asian session, regional equities popped higher on hopes the Fed will cut rates to offset the negative impact of ongoing trade wars. However, most indices gave up some gains after the World Bank downgraded its forecast for the world economy, citing the escalating trade disputes as a core headwind , and U.S. President Donald Trump clarified that the duties levied against Mexico were “no bluff!”.

    Japan’s Nikkei 225 outperformed, surging 1.8%, while China’s Shanghai Composite lagged as the only major regional benchmark closing in the red (-0.03%). If China’s own stimulus failed to support the index from slipping almost a full percentage point yesterday, it appears that a potential Fed cut also failed to excite Chinese traders. Mexico’s confidence in resolving its dispute with the U.S. does not help China either: if anything, the less distracted Trump is with other countries, the more focused he can be on China.

    h2 Global Financial Affairs/h2

    In Tuesday’s U.S. session, shares on all four major indices jumped at least 2%—the most since Jan. 4. Powell acknowledged the uncertainty of “trade negotiations,” their possible adverse impact on the U.S. economy and the Fed’s commitment to its 2% inflation target.

    “We are closely monitoring the implications of these developments for the U.S. economic outlook and, as always, we will act as appropriate to sustain the expansion,” said Powell—Fedspeak for putting a rate cut squarely on the table.

    The argument for a potential rate cut was reinforced with Vice Chair Richard Clarida, who repeated the message that the Fed would “put in place policies that not only achieve but sustain price stability and maximum employment, and we’ll do that if we need to.” The move would align U.S. policymakers with global central banks, which have been less hesitant in shifting from tightening to loosening based on economic data.

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    Clarida made a rare reference to financial markets, saying the central bank can’t be “handcuffed” to them and suggesting it was too early to take a signal of concern from the inverted Treasury yield curve, though he would take it seriously if the situation persisted. In other words, while the Fed's monetary policy isn’t dictated by investors, the central bank might follow their lead if they are stubborn enough—which is why the financial market is a leading indicator of the economy.