US stock indices rose Tuesday morning as investors prepared for the Federal Reserve’s policy decision this week and reviewed a series of gains.
The S&P 500 climbed 0.8%, supporting momentum from a late rally that pushed stocks higher on Monday, the first business day of May. The technology-focused Nasdaq Composite gained 0.3%, while the Dow Jones Industrial Average rose 0.4%. Ten of the S&P’s 11 industrial subsectors were in the green.
Those moves belied a tense mood among investors who expected the US central bank to accelerate monetary policy this week, the latest step in inflation-fighting efforts that have already pushed borrowing costs across the economy this year, causing stock and bond markets to mix up. were shaken.
Recent economic data shows higher costs for everything from groceries to energy costs. Businesses are also facing rising wages as labor markets remain tight. That has put inflation at the top of the Fed’s agenda, triggering measures that could add additional turbulence to equity markets, said Andrew Hollenhorst, the chief US economist at Citigroup.†
“Even if we get exactly the Fed policy that’s expected to be announced… will risky assets still come to terms with that?” said Mr. Hollenhorst.
Meanwhile, traders are reacting to the latest reports and financial forecasts from a host of major companies. Investment firm KKR rose 2% after a reversal to loss. Estee Lauder lost 5.3% after the company cut its revenue and earnings outlook. Rockwell Automation said its quarterly results plummeted, pushing its stock down 13%.
In other business headlines, Elliott Investment Management disclosed a roughly 6% stake in Western Digital, pushing the data storage company’s shares up 12%. Healthcare Realty Trust shares rose 11% after The Wall Street Journal reported Welltower remained an interested bidder following a previous takeover proposal, despite Healthcare Realty’s agreement to merge with Healthcare Trust of America†
Generally positive corporate reports have not kept the market stable in recent weeks. Earnings growth is in line with historical norms, according to Deutsche Bank analysts, at around 11% per year, while margins have remained close to record levels despite rising input prices. Still, the S&P has lost about 13% so far.
The winning season continues. Airbnb, Starbucks†
Lyft and American International Group are on the block after the markets close.
One factor weighing on the markets is the higher yields on government bonds, which, as they rise, offer investors more competitive, low-risk returns compared to equities. Earlier on Tuesday, 10-year government bond yields were above 3% for the second day in a row, before sliding back to 2.917%, compared to 2.995% Monday. Yields, which are inversely proportional to bond prices and a benchmark for borrowing costs across the economy, have risen to their highest levels since 2018 in anticipation of higher interest rates.
They have also driven up the cost of government borrowing worldwide. The yield on 10-year German government bonds, the benchmark in Europe, surpassed 1% for the first time since 2015, before falling back to 0.935% on Tuesday.
All eyes are on the Fed as the central bank tries to slow down the fastest rate of inflation in decades. Rising rates have combined with the coronavirus shutdown in China and the war in Ukraine to send stocks tumbling this year.
Rate-setting officials will meet Tuesday for a two-day policy meeting. At the close of Wednesday, the Fed is expected to raise interest rates by half a percentage point, the first such hike in 22 years and following a quarter point increase in March.
Investors will ask Chairman Jerome Powell for details about the central bank’s plans to reduce its bond holdings. Officials recently indicated that they will be maturing $95 billion in securities each month, unwinding another form of stimulus that was offered to the markets during the pandemic.
“It appears that the war in Ukraine has not derailed the Fed in the slightest,” said Gregory Perdon, co-chief investment officer at Arbuthnot Latham.†
Financial conditions have already tightened considerably, added Mr. Perdon pointed to it, pointing to a strengthening dollar, rising government bond yields and rising mortgage rates.
Foreign stock markets faltered. The Stoxx Europe 600 gained about 0.3%, led by shares of banks and oil and gas companies on a busy day for gains in the region.
BP shares rose 4.1% after the oil producer reported underlying profit of $6.2 billion, having removed a pre-tax accounting charge related to its decision to exit its Russian holdings. BNP Paribas posted a profit jump, pushing shares of the French lender up 4.8%.
The Swedish OMX Stockholm All-Share remained stable and moved roughly flat. On Monday, the market was one of the hardest hit by a sudden crash in European equities following a misselling by Citigroup.
Mainland Chinese markets were closed for a holiday. The Hang Seng in Hong Kong rose 0.1%.
In commodities, Brent crude futures prices fell 1% to $106.55 a barrel. Traders await a meeting of ministers of OPEC members and their allies, including Russia, on Thursday and monitor closures in China that curb fuel demand.
A European Union proposal to ban Russian crude oil by the end of the year will be sent to member states on Tuesday.
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