Stocks Drop, Dollar Steady With Focus on Powell: Markets Wrap

(Bloomberg) — Stocks fell on renewed concern about higher-for-longer US interest rates, with all eyes on the Federal Reserve’s policy decision due later Wednesday. Brent crude sank for a third day.

Most Read from Bloomberg

The risk-off mood prevailed in a holiday-thinned session in Europe and Asia. Contracts on the S&P 500 dropped 0.5%, pointing to further losses on Wall Street after US data on Tuesday reinforced bets officials will keep rates steady at a two-decade high. Europe’s Stoxx 600 edged lower. A dollar gauge was little changed, while policy sensitive two-year Treasury yields held near a six-month high.

The last time Fed Chair Jerome Powell spoke, he pointed to the lack of progress in bringing inflation down. The most recent signals on prices and the economy — along with expectations for a robust employment report on Friday — are unlikely to prompt a change of tune.

“We are unlikely to hear anything dovish from the Fed today,” said Lilian Chovin, head of asset allocation at Coutts. “The higher-for-longer narrative is not easy for markets to navigate.”

Traders are bracing for big moves in stock markets and bonds are turning more bearish ahead of what many expect will be a hawkish tilt from Powell. After positioning at the start of the year for multiple reductions in 2024, investors are now pricing in just one full quarter-point cut.

The options market is flagging a bigger move in the S&P 500 Index than at any point in the past 11 months.

“If the Fed asserts a high probability of no cuts this year, or even the open possibility of another hike, that could deepen the selloff in stocks,” said Kyle Rodda, a senior market analyst at Capital.com.

Meanwhile, data for the week leading up to April 23 showed hedge funds building short positions in bond futures. Commodity trading advisors, or CTAs, are now sitting at near “max short duration,” according to Bank of America strategists.

Ahead of the meeting, traders face a slew of US economic releases including job openings and manufacturing data. They will also be on the watch for the Treasury’s quarterly plan of long-term debt sales, which are expected to remain steady, and the exact date for a Treasury program to buy back existing debt.

Oil, Tesla

Oil extended declines, with Brent slumping 1.6% to below $85 a barrel. Prices dropped on prospects for a cease-fire in the Middle East as well as data that pointed to a rise in US crude inventories. Traders are alert to signs that elevated inflation will damp demand before the driving season.

In corporate moves, Tesla Inc. shares fell as much as 1.8% in premarket trading after the car maker eliminated almost its entire Supercharger organization. Amazon.com Inc. gained about 2.5% before the start of regular trading on strong cloud unit sales. Advanced Micro Devices Inc., the second-biggest maker of computer processors, fell as much as 6.5% following a disappointing forecast for artificial intelligence processors.

Elsewhere, global investors are unwinding bets on local-currency bonds in emerging markets as some central banks come under pressure to raise interest rates. A Bloomberg gauge of the asset class fell 1.3% in April, the the biggest monthly decline since September.

Key events this week: