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Research Market strategy
by Swissquote Analysts
Daily Market Brief

US Equities Mostly Bearish as Fed’s Statement Failed to Support Rally

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US Equities Mostly Bearish as Fed’s Statement Failed to Support Rally

By Strategy Desk

US stock indices took different routes on Wednesday but bears dominated the market at the end of the session. The S&P 500 ended lower despite the fact that the Fed hinted it would maintain interest rates close to zero for a long period. The benchmark index was dragged down by tech stocks.

Shortly after the Fed released its statement, the S&P 500 extended gains while the Dow surged over 1%. Investors focused on the central bank’s commitment to keeping the rate low until inflation moderately exceeds its 2% target “for some time.” Economic projections anticipate that the rates will remain on hold until no earlier than 2023.

However, the tech sector spoiled the party, dropping 1.6% on the day and dragging the index down. Thus, the S&P 500 ended 0.46% lower. Nasdaq lost 1.25%, while the Dow secured a modest gain of 0.13%. The tech sector experienced massive selloff in the previous two weeks, as the market was moved by institutional investors that had exposure to tech stocks through options and other derivatives.

For some analysts, the comments by Fed Chairman Jerome Powell were more dovish than expected, so the bearish mood is somewhat surprising. Still, the Fed failed to provide further details on stimulus, which might have caused frustration among investors. Powell concluded that the US economic activity remained below pre-COVID levels and that the path for recovery from the coronavirus crisis “remains highly uncertain.”

Yesterday, the US Commerce Department said that retail sales had increased by 0.6% in August, which is less than the expected 1%. In July, the indicator was downwardly revised to reflect a 0.9% increase.

In Asia, stocks are also bearish, as the sentiment around the US tech selloff prevailed over the Fed’s accommodative stance.

At the time of writing, China’s Shanghai Composite is down 0.76% while the Shenzhen Component has declined by 0.80%. The tensions between the US and China are reflected in the attempted deal between Oracle and TikTok parent ByteDance. US President Donald Trump raised concerns over the partnership.

Hong Kong’s Hang Seng is down 1.63%.

Japan’s Nikkei 225 has lost 0.68%. Yoshihide Suga was elected as new prime minister in a parliamentary vote held yesterday. He promised to continue Shinzo Abe’s Abenomics policy. Just recently, the Bank of Japan kept its policy steady.

South Korea’s KOSPI has tumbled 1.19%.

In Australia, the benchmark ASX 200 has dropped by 1.09%. Data released earlier today showed that the unemployment rate fell last month to 6.8% from July’s 7.5%, which is a good sign for the labor market. Also, employment rose 110,000 y/y against the expected decline of 35,000.

It is unlikely that Europe will go against the general trend, as futures are flashing red at the moment, suggesting a bearish open for most major indices.

In the commodity market, oil prices have retreated from their weekly peaks, as investors are concerned about the oversupply amid weak demand during the pandemic, even as Hurricane Sally disrupted production in the US Gulf Coast. Production platforms are planning to restart operations after the storm. Both WTI and Brent have lost over 1.1%, with the former trading at $39.62 while Brent hovers around $41.75. Crude prices rallied in the two previous sessions.

Oil was also dragged down by a bigger-than-expected increase in US distillate stockpiles, which include heating oil and diesel. The US Energy Information Administration said yesterday that distillate stockpiles rose 3.5 million barrels in the previous week. Still, weekly demand for fuel dropped to 2.81 million barrels per day, down over 27% compared to the same period in 2019.

Members of OPEC+ will meet later today but no further production cuts are expected.

In the long-term, the fuel might be overshadowed by alternative energy resources, as the world is gradually turning towards electric vehicles. Also, hydrogen might be the new catalyst for the energy sector. On Wednesday, Bloomberg reported that Indian Oil Corp, India’s biggest refiner that sells 50% of the oil products in the country, would roll out 50 buses powered by a mix of hydrogen and a compressed natural gas.

Giovanni Serio of Vitol Group, the world’s largest independent energy trader, said that hydrogen might be the most disruptive energy resource, having the potential to grow 10 times until 2050.

BloombergNEF estimated that the new market would need about $11 trillion of investment in production, storage and transport infrastructure to meet 25% of the total energy demand by 2050.

Elsewhere, Gold is declining from its two-week highs as the US dollar is gaining traction given the Fed’s accommodative policy.

The US currency initially declined after the Fed’s statements and disappointing retail sales data. However, it quickly returned to growth after Powell’s comments on the economic outlook, even though he admitted that the path head remained uncertain. The USD Index rose 0.33%, while EUR/USD declined 0.41% to drop below 1.1770.

The pound is extending gains against the euro ahead of the Bank of England meeting due for later today. However, the sterling is down against the US dollar.

 
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