US equities took a breather after reaching new all-time highs this week, while government bonds softened, ahead of a wave of closely watched quarterly earnings results and the Federal Reserve’s monetary policy meeting.
The S&P 500 rally paused on Tuesday near the intraday high it hit on Monday following a rally driven by optimism about a global recovery from the pandemic and strong corporate earnings. The blue-chip index slipped 0.1 per cent in mid-afternoon trading.
The technology-focused Nasdaq Composite, having achieved its own record close on Monday, also slid 0.3 per cent ahead of results from Microsoft, Google parent Alphabet and Facebook.
The yield on the 10-year US Treasury, which influences borrowing costs worldwide, ticked up more than 0.04 percentage points to 1.61 per cent, indicating a drop in price. A decent auction of seven-year debt on Tuesday that saw solid demand failed to spark a turnround.
Analysts expect Fed chair Jay Powell, at his press conference on Wednesday, to repeat his long-held message that the central bank will prioritise economic recovery and a strengthening labour market over making any moves to tame rising inflation.
“Powell is likely to emphasise that the labour market is still far from normal and that any pick-up in inflation that accompanies the recovery is likely to be transitory,” said Chris Scicluna, economist at Daiwa.
But investors are on alert for any hints that the Fed will consider reducing its $120bn monthly bond purchases in the months ahead. Such concerns were heightened last week when the Bank of Canada became the first G7 central bank to scale back its pandemic-era purchases.
Powell could start to “recalibrate his message” at Wednesday’s press conference, said Bastien Drut, chief thematic macro strategist at CPR Asset Management.
“The US economy is performing really well,” Drut said, referencing recent retail sales and employment data. “I see the Fed getting ready to change its communications.”
Other analysts were less certain. “The Fed will be extremely careful; they know what impact even small changes in language can have,” said Andrew Patterson, senior international economist at Vanguard. “Remember the taper tantrum in 2013,” he added, referring to when former Fed chair Ben Bernanke sent markets into a tailspin by remarking that the central bank’s third round of quantitative easing could slow in “the next few meetings”.
The dollar index, which measures the currency against major trading peers, rose 0.2 per cent as cautious investors picked up the haven asset. This benchmark remains around its lowest level since early March, however, having declined as riskier assets such as stocks and metals rallied.
Foreign exchange traders had predicted a fall in the dollar of up to 20 per cent this year because of loose monetary conditions in the US. Those bets were upended by the fast pace of the US recovery and speculation of Fed policy tightening.
“Investors are approaching foreign exchange markets with an abundance of caution,” said Mimi Rushton, co-head of global forex sales at Barclays, with trading volumes “lower than the norm”. This was likely to continue until the Fed’s message changed and investors could “think more clearly about the next potential moves”, she added.
In Europe, the region-wide Stoxx 600 equity index closed down 0.1 per cent, although it remained near its all-time high hit in mid-April. The UK’s FTSE 100 lost 0.3 per cent.
Oil prices rose marginally on Tuesday with Brent crude adding 0.5 per cent to $65.91 a barrel, as Opec and allies like Russia decided to stick with their plan of gradually tapering supply cuts between May and July.
The group had been due to meet virtually on Wednesday but moved forward the decision given there was broad agreement that demand has continued to strengthen, despite some concerns about surging coronavirus cases in countries like India.
Additional reporting by David Sheppard