Wall Street calm as investors look to Fed after stock rally

By Lawrence Delevingne and Huw Jones

-Global stocks fell on Wednesday after a long rally pushed them toward recent record highs, and as investors waited for clues on Federal Reserve interest rate cuts to decide their next move.

Federal Reserve Chairman Jerome Powell is expected to further cement the view that the central bank is poised to begin easing credit conditions after taming the worst bout of inflation in 40 years when he speaks Friday at the Federal Reserve conference in Jackson Hole, Wyoming.

Oil prices fell in afternoon trading in the United States, while a weaker dollar on the prospect of rate cuts kept gold near Tuesday’s record high.

On Wall Street, the Dow Jones Industrial Average was virtually unchanged at 40,858 points, the S&P 500 gained 0.28% to 5,612 and the Nasdaq Composite gained 0.3% to 17,871.

The MSCI All Country Index of world equities gained 0.27%, near its record high seen in mid-July and up 13.5% for the year.

In Europe, the STOXX index of 600 companies rose by around 0.3%, also approaching its all-time high reached on June 7.

Stocks have been on a roller coaster this month after investors became spooked by U.S. jobs data that raised the prospect of a recession in the world’s largest economy.

Those concerns have given way to bets on a soft landing cushioned by cuts in U.S. borrowing costs expected to begin in September.

U.S. employers added far fewer jobs than originally reported in the year through March, the Labor Department said Wednesday, underscoring growing concerns the Fed has about the health of the labor market.

Minutes from the Federal Reserve meeting are also expected to be released later on Wednesday to reinforce a dovish stance.

“We expect the Fed chairman to continue to signal that a first rate cut is on the cards in September. However, there is a chance that investors will be disappointed by his comments if there is any reference to inflation stickiness,” said Guy Stear, head of developed markets strategy at Amundi Investment Institute.

Interest rate futures have already priced in a 25 basis point cut in U.S. interest rates next month, with a one in three chance of a 50 basis point cut. Nearly 100 basis point cuts for this year and another 100 basis points next year have been priced in.

U.S. Treasury yields fell. The benchmark 10-year note yield fell 3.4 basis points to 3.784%, from 3.818% late Tuesday. The 2-year note yield, which typically moves in line with interest rate expectations, fell 7.2 basis points to 3.9284%.

A potentially unique situation is looming with major rate cuts without a recession, unlike the backdrop of borrowing cost cuts in five of the past seven cutting cycles, said Ross Yarrow, managing director of U.S. equities at investment bank Baird.

“If you have a scenario where the Fed is cutting, inflation is falling and employment continues to rise, it really starts to look like a Goldilocks scenario,” Yarrow added.

“So I think the rally in stocks and their prospects from here are actually pretty good.”

Markets may still be tight, said Sameer Samana, senior global markets strategist at Wells Fargo Investment Institute.

“We see markets being range-bound until after the November election,” Samana wrote in an email.

MSCI’s broadest index of Asia-Pacific shares outside Japan fell 0.34%.

Hong Kong’s Hang Seng fell 0.7% and JD.com fell 8.7% as its largest shareholder, Walmart, decided to sell its large stake.

Japan’s Nikkei fell 0.3% as its recovery from the early August collapse met resistance around the 38,000 level.

The dollar’s decline pushed gold to record highs and pushed the yen back to 145.140 per dollar from its 38-year low last month.

The euro has also gained around 3% in August and, at $1.115, is at its highest level since early December. [FRX/]

Oil prices fell again on Wednesday. US crude lost 1.69% to $71.93 a barrel and Brent fell to $76.09 a barrel, down 1.44% on the day.

Gold prices hovered around $2,500 an ounce, just below the record levels hit on Tuesday.

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