Stocks reversed to trade higher on Wednesday after the Federal Reserve slashed its rate-hike outlook for 2019 to zero.
The S&P 500 was up 0.2 percent while the Nasdaq Composite traded 0.5 percent higher. The Dow Jones Industrial Average traded just 10 points lower after falling 216.46 points earlier in the day.
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The Fed brought down its 2019 rate-hike forecast to no increases down from two hikes. The central bank also indicated it intends to end the reduction of its massive $4.2 trillion balance sheet by September. However, the central bank also lowered its economic growth forecast for 2019.
“There was a great deal of potential dovishness priced into the market ahead of this move,” said Art Hogan, chief market strategist at National Securities. “But in terms of the best-case scenario for the market, the headlines are giving us that.”
“Expectations were to remove one dot from the dot plot and to have some description of when the balance sheet run-off would conclude. This actually exceeds expectations.”
Treasury yields fell sharply on the announcement, with the benchmark 10-year rate falling to its lowest level in a year to trade at 2.539 percent. The 2-year yield also dropped to 2.394 percent.
Bank stocks fell broadly along with rates. The SPDR S&P Bank ETF (KBE) dropped 1.7 percent. Goldman Sachs declined 2.2 percent while Bank of America, Morgan Stanley, J.P. Morgan Chase and Citigroup all fell more than 0.7 percent.
“The market might be pricing in more than a cut through next year,” said Mike Collins, senior portfolio manager at PGIM Fixed Income. “It feels like their done.”
However, “it’s really a tricky spot. If things slow too much and the Fed starts cutting, that’s actually not a great environment for equities or corporate earnings or credit risk,” Collins said. “It can become a self-fulfilling prophecy, for sure.”
Equities were down earlier in the day after President Donald Trump said U.S. tariffs on Chinese goods could stay on for a long period of time.
“We’re not talking about removing [tariffs], we’re talking about leaving them for a substantial period of time because we have to make sure that if we do the deal with China that China lives by the deal,” Trump told reporters. His comments confused some traders, however, as Trump also said a deal is “coming along nicely.”
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His comments come a day after Bloomberg News reported some U.S. officials are worried China could walk back on some concessions. However, The Wall Street Journal said U.S. Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin both plan to travel to Beijing next week for another round of negotiations with Chinese Vice Premier Liu He. These reports buffeted stocks on Tuesday.
China and the U.S. have been working on a deal for weeks and investors have priced in one being done. Concerns over global growth also weighed on stocks prior to the Fed’s announcement.
FedEx shares fell more than 5 percent after CFO Alan Graf warned in the company’s quarterly report that “slowing international macroeconomic conditions and weaker global trade growth trends continue, as seen in the year-over-year decline in our FedEx Express international revenue.”
That warning was followed by UBS CEO Sergio Ermotti saying this is one of the worst first-quarter environments ever as investment banking revenue falls about a third from the year-earlier period. Meanwhile, German auto maker BMW said its earnings could fall significantly in 2019 and added it will cut $13.6 billion in costs.
“We’re not out of the woods by any means,” said Christian Fromhertz, CEO of The Tribeca Trade Group. “These are things that continue to be bumps in the road with the equity market. You need the two things to happen: The Fed needs to stay dovish and you need a trade deal to eventually get done. You’re seeing that through FedEx and BMW.”
Source: cnbc.com | Original Link