US futures rally after the S&P 500 officially fell into a bear market, while the dollar hits 20-year highs as investors bet on big Fed rate hikes

This post was originally published on this site
  • US futures rose Tuesday after the S&P 500 slipped into bear market territory the previous day. 
  • Meanwhile, the dollar hovered at two-decade highs and Treasuries eased from 11-year peaks.
  • Investors now expect the Fed to deliver a 75-basis point interest rate hike on Wednesday. 

US stock futures bounced back Tuesday suggesting some market relief after the S&P 500 entered bear market territory the previous day, while the dollar shot upwards to a two-decade high ahead of the Federal Reserve’s rate decision due on Wednesday. 

The overarching consensus points to the Fed likely lifting interest rates further after Friday’s US inflation data unexpectedly showed consumer prices accelerated at their fastest pace in 40 years last month, rising 8.6% through May. To that end, economists at JP Morgan and Goldman Sachs forecast the Fed to increase the benchmark interest rate by 75 basis points at their upcoming meeting. This would be the largest single rate increase since late November 1994, when Alan Greenspan headed the central bank.

Futures on the S&P 500 and Nasdaq climbed 1.1% and 1.3% respectively, while those on the Dow Jones rose 0.9%. 

The S&P 500 officially entered a bear market on Monday, after the index recorded a 20% drop from its January record high. The Nasdaq Composite fell more than 4% and the Dow Jones Industrial Average plummeted 875 points, or 2.8%.

“The Fed could embrace a much more aggressive tightening bias than currently priced in. With inflationary pressures broadening dramatically, policymakers will have to get tougher in their fight to restore price stability and to regain control of the narrative,” Diego Colman, a market analyst at DailyFX said. 

Meanwhile, the dollar jumped to a fresh two-decade high on Monday, gaining nearly 1% to 105 against a backdrop of hawkish Fed expectations. By Tuesday, the US currency had eased back a touch from those highs, slipping 0.33% to stand at 104.86. 

“DXY is breaking out sooner than expected but we wouldn’t fight this move, especially into this week’s FOMC. Chair Powell and the FOMC will surely stick to their resolutely hawkish stance,” analysts at FX Street said, adding “From here DXY can make a run at 107.”

US Treasuries yields edged lower after rocketing to an 11-year high on Monday, with the 10-year US Treasury note yielding 3.328%. The 2-year US Treasury note, which is the most sensitive to interest rate expectations, stood near its 2007 high at 3.313%.

In Asia, stocks fell, with the Nikkei 225 dropping 1.32%, while the Shanghai Composite Index increased 1.02%. Hong Kong’s Hang Seng was flat.

In the world of cryptocurrencies, bitcoin suffered further damage from a market crash the previous day, hot off the heels of crypto lender Celsius announcing it will pause withdrawals and transfers due to “extreme market conditions.”

The world’s largest digital coin fell about 7% overnight to its lowest since December 2020 to trade at $20,950. At 5:24 am ET on Tuesday, bitcoin had made some recovery, standing at $22,653, according to CoinMarketCap data. The overall weakness in the crypto market comes as a declining US economy deters investors from high-risk assets. 

Read more: BANK OF AMERICA: Markets are highly volatile – so invest in these 23 stocks primed to deliver long-term returns