Equities pared their losses during a press conference by Chairman Jerome Powell, led by bank stocks, and after he talked up the strength of the U.S. economy and suggested that the Fed may need to expand its balance sheet in order to combat a liquidity shortage that has beset money markets in recent days.
How did the major benchmarks fare?
The Dow Jones Industrial Average DJIA, +0.13% rose 36.28 points, or 0.1% to 27,147, while the S&P 500 SPX, +0.03% added 1.03 point, or less than 0.1%, to 3,006.73. The Nasdaq COMP, -0.11% lost 8.63 points, or 0.1%, to close at 8,177.39.
At session lows, the Dow was down 211.65 points, the S&P had lost 26.97 points and the Nasdaq fell 99.80 points.
What drove the market?
The Fed announced it would cut the benchmark federal funds rate a quarter percentage point to a range of 1.75% to 2% Wednesday afternoon, but said in an accompanying statement that “sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2% objective are the most likely outcomes.”
The language of the statement appeared to communicate that Wednesday’s rate cut would be the final one of the year, while fed funds futures markets have shown that investors expected at least another rate cut between now Dec. 11, the interest-rate setting committee’s final meeting of 2019.
The Fed also released a survey of Fed Board members and regional Fed bank presidents, which showed that the median respondent believes the Fed funds rate would be at present levels through the end of 2020.
Three members of the Federal Reserve’s interest-rate setting committee voted against Wednesday’s decision, with Kansas City Fed President Ester George and Boston Fed President Eric Rosengren voting against a rate cut, while St. Louis Fed President James Bullard preferred to cut rates by 50 basis points, rather than 25.
“The statement was largely unchanged from July and, along with the new economic projections that were also almost completely unchanged – it suggests most Fed officials still see a rebound in economic growth as their base case scenario, which means any further rate cuts would be limited,” wrote Paul Ashworth, chief U.S. economist at Capital Economics, in a note.
During a news conference following the decision, Fed Chairman Jerome Powell talked up the strength of the economy, saying that the Fed funds rate was cut “in order to provide insurance against risks,” including weak global growth and concerns over trade policy.
Bond yields rose in the wake of the decision, with the yield on the 10-year U.S. Treasury note TMUBMUSD10Y, -0.34% paring its losses from 7 basis points to 2 basis points, to 1.788%. The yield on the 2-year U.S. Treasury note TMUBMUSD02Y, +1.44% rose 3 basis points to 1.754%.
Those moves buoyed the banking sector, with shares of J.P. Morgan Chase & Co. JPM, +0.12% rising 1% and shares Goldman Sachs Group Inc. GS, +0.02% adding 0.5%. The two moves combined to add roughly 16 points to the Dow Jones Industrial Average.
“Markets were already pricing in a 25 basis-point cut, and what they wanted to learn was whether there would be more cuts in the future,” Shawn Cruz, manager of trader strategy at T.D. Ameritrade told MarketWatch. “The details we got out of the meeting and the tone of the press conference told us it’s not a sure thing that we’ll see a continuation of stimulus.”
Investors were also watching the central bank’s intervention in money markets on Wednesday to resolve unexpected liquidity issues. Major stock indices pulled back from their worst levels on the day after Powell said “It is certainly possible that we’ll need to resume the organic growth of the balance sheet sooner than we thought,” in response to the liquidity shortage.
Though Powell stressed that balance sheet expansion would not be a resumption of quantitative easing, or Fed purchases of debt securities in an effort to reduce long-term interest rates, equities moved higher nonetheless. “It’s still considered accommodative as it can serve to put more dollars in circulation,” Cruz said, explaining the move.
The New York Fed held a second repurchasing auction early Wednesday, injecting another $75 billion by temporarily buying securities from Wall Street dealers. The Fed on Tuesday carried out its first overnight repurchase auction in a decade to bring the benchmark federal-funds rate, which jumped to a high around 9%, back into a desired 2%-2.25% range by purchasing repos worth $53 billion.
Markets are also watching Middle East developments after Saudi Arabia’s oil-processing hub was attacked over the weekend by reported drone and missile attacks.
On Wednesday, Saudi Arabia’s Defense Ministry exhibited debris from the recent attack on its facilities, saying they are evidence that Iran was “unquestionably” behind the strike, adding the attack did not originate from Yemen to the south but from the north and Iran. President Trump has said he does not want war with Iran though U.S. Secretary of State Pompeo is heading to Saudi Arabia and Trump on Wednesday called for more sanctions on Iran.
Saudi Arabia will soon restore most of its oil output and return to normal production levels in weeks, the country’s energy ministry said Tuesday, following the attacks last weekend on the country’s facilities that hobbled the world’s largest oil exporter.
The attack initially caused the Brent price BRNX19, -0.11%, the international benchmark, to rise 15% on Monday, the biggest single-session rise on record dating back to 1988, but U.S. benchmark crude, West Texas Intermediate grade CLV19, -1.84% and Brent oil have been giving up much of their gains since then.
Which stocks were in focus?
Shares of FedEx Corp. FDX, -0.16% tumbled 12.9% after the logistics group missed profit expectations and cut its outlook, citing “increasing trade tensions,” and global economic sluggishness. Competitor UPS UPS, +0.28% also saw its stock fall as Trump’s trade war takes its toll on international traffic.
Chewy Inc.’s stock CHWY, +0.18% declined 6.2% after the pet food retailer reported results.
CDW Corp.’s shares CDW, +5.78% rose 5.8% on news the tech group will join the S&P 500 this month.
AT&T Inc.’s stock T, +0.84% was in focus amid reports that bankers were pushing the telecom giant to unload its DirecTV unit. Shares fell 1.1% Wednesday.
Altice USA Inc. ATUS, +1.39% shares rose 1.4% to a 2-year high Wednesday after the internet and phone services company’s CEO said he was “absolutely open” to the idea of being acquired.
Trade in McDermott International Inc. MDR, +18.52% stock was halted late Wednesday morning due to pending news, announcing that it has engaged turnaround consulting firm AlixPartners LLP to help improve its financial performance. The stock fell 63.3%, the largest single-day decline in the stock since it went public in 1982.
How did other markets trade?
Gold prices GCZ19, -0.77% rose $2.40, or 0.2%, to settle at $1,515.80 an ounce, while the U.S. dollar, as measured by the ICE U.S. Dollar Index DXY, +0.29%, a gauge of the buck against a basket of leading rivals, rose 0.3%.
In Asia overnight, Hong Kong’s Hang Seng Index HSI, -0.13% fell 0.1%. China’s CSI 300 Index 000300, +0.48% gained 0.5% after a 1.7% drop on Tuesday, and Japan’s Nikkei 225 index NIK, -0.18% fell 0.2%.
In Europe, the Stoxx Europe 600 SXXP, +0.02% closed virtually unchanged.
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