(Bloomberg) — The stock market came under pressure, with traders on high alert before a $44 billion sale of seven-year notes that follows two weak auctions on Tuesday.
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US Treasury auctions are exerting a growing sway over equities, underscoring how the uncertainties over the path of Federal Reserve policy is gripping markets of late. Amid worries that swelling supply will drive bond yields higher — posing a headwind to shares — the auctions have been a key focus for investors. And they come at time when equities haven’t been looking necessarily cheap.
“The “set up’ right now is quickly becoming a concern,” said Matt Maley at Miller Tabak + Co. “Not only are yields rising again in the US, but they are moving higher in other parts of the world as well. That is not good news for a stock market that is trading at 22 times forward earnings.”
The S&P 500 dropped below 5,300, trimming its May rally. Longer maturities led losses in Treasuries, with 30-year yields up five basis points to 4.72%.
German benchmark borrowing costs hit the highest since November after inflation quickened more than expected, denting bets on a faster pace of rate cuts by the European Central Bank. The pound rose to the strongest level against the euro in almost two years as the Bank of England is increasingly expected to trail the ECB in easing policy.
“Equities wake up to higher global long rates,” said Andrew Brenner at NatAlliance Securities. “Treasuries bear steepen again. The Street got too long and is now paying the price. And global rates are starting to look even uglier.”
The seven-year Treasury auction will likely be the most important catalyst for markets on Wednesday, according to Tom Essaye at The Sevens Report.
“Another soft auction outcome will further pressure stocks, while strong demand for the notes could help stocks stabilize,” he noted.
Just a few days before the Fed’s favorite price gauge, the central bank will release the Beige Book survey of regional business contacts. The latest report released on April 17 said the US economy had “expanded slightly” since late February and firms reported greater difficulty in passing on higher costs.
“We expect a balanced tone in this report that will allow the Fed to take a wait and see approach with regards to easing,” said Win Thin and Elias Haddad at Brown Brothers Harriman & Co.
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Fed Chair Jerome Powell and his colleagues have stressed the need for more evidence that inflation is on a sustained path to their 2% goal before cutting the benchmark interest rate, which has been at a two-decade high since July.
The options market is betting that the S&P 500 will see muted swings following this week’s bond auctions and the Fed’s favorite underlying inflation gauge Friday, with traders instead looking ahead to next month’s reading on consumer prices and the central bank’s upcoming meeting.
The benchmark equities gauge is implied to move just 0.5% in either direction on Friday following the personal consumption expenditures price index, based on the cost of at-the-money puts and calls, per Stuart Kaiser, Citigroup Inc.’s head of US equity trading strategy.
The reading is less than the implied move on June 7 — the next jobs report — and CPI and the Fed’s upcoming rate decision — both on June 12, which would be the largest ahead of a central bank meeting since December, Kaiser said.
Corporate Highlights:
Abercrombie & Fitch Co. raised its full-year outlook after it blew past first-quarter sales estimates and extended its bounce back from the teen fashion graveyard.
Dick’s Sporting Goods Inc. raised its outlook for the year and reported sales that surpassed analysts’ estimates with strong demand for sports gear across categories.
American Airlines Group Inc. spooked investors with a revised profit outlook that adds to uncertainty in the aviation industry already grappling with geopolitical tensions, scarce supplies of new aircraft and rising costs.
ConocoPhillips agreed to acquire Marathon Oil Corp. in an all-stock deal valuing the company at about $17 billion, extending a major buying spree among the largest players in the US oil and gas industry.
Robinhood Markets Inc. announced a plan to repurchase as much as $1 billion of its own shares.
Key events this week:
Eurozone economic confidence, unemployment, consumer confidence, Thursday
US initial jobless claims, GDP, Thursday
Fed’s John Williams and Lorie Logan speak, Thursday
Japan unemployment, Tokyo CPI, industrial production, retail sales, Friday
China official manufacturing and non-manufacturing PMI, Friday
Eurozone CPI, Friday
US consumer income, spending, PCE deflator, Friday
Fed’s Raphael Bostic speak, Friday
Some of the main moves in markets:
Stocks
The S&P 500 fell 0.6% as of 9:53 a.m. New York time
The Nasdaq 100 fell 0.5%
The Dow Jones Industrial Average fell 1%
The Stoxx Europe 600 fell 1%
The MSCI World Index fell 0.9%
Currencies
The Bloomberg Dollar Spot Index rose 0.3%
The euro fell 0.2% to $1.0840
The British pound fell 0.2% to $1.2740
The Japanese yen fell 0.1% to 157.33 per dollar
Cryptocurrencies
Bitcoin fell 0.8% to $67,716.04
Ether fell 1.1% to $3,787.76
Bonds
The yield on 10-year Treasuries advanced four basis points to 4.59%
Germany’s 10-year yield advanced seven basis points to 2.66%
Britain’s 10-year yield advanced eight basis points to 4.36%
Commodities
West Texas Intermediate crude fell 0.1% to $79.75 a barrel
Spot gold fell 0.7% to $2,344.07 an ounce
This story was produced with the assistance of Bloomberg Automation.
–With assistance from Jessica Menton.
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