(Bloomberg) — A selloff in European assets amid heightened political risk hit stocks and bonds around the globe, with investors also positioning for this week’s Federal Reserve decision.
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Stocks and bonds dropped across the board after French President Emmanuel Macron called a legislative vote in the wake of a crushing defeat in the European Parliament elections. Yields on France’s 10-year government bonds hit their highest level this year, while shares in the nation’s top banks tumbled almost 10%. The euro led losses in developed world currencies.
“The growing uncertainties in Europe have those markets from across the pond trading lower this morning in a material way,” said Matt Maley at Miller Tabak + Co. “Although it’s hard to decipher what it will mean for the global economy and global markets over the near-term, it does raise uncertainties about the longer term.”
The S&P 500 fell to around 5,340. Nvidia Corp. began trading after a 10-for-one stock split. Apple Inc.’s developers conference on Monday will show whether the iPhone maker can become a major player in the burgeoning field of artificial intelligence.
Treasury 10-year yields rose three basis points to 4.46%. The dollar climbed 0.3%.
Investors are also positioning for Wednesday’s Fed decision.
The central bank — led by Chair Jerome Powell — is widely expected to hold borrowing costs steady for a seventh consecutive meeting, but there’s less certainty on officials’ rate projections.
A 41% plurality of economists expect the Fed to signal two cuts in the closely watched “dot plot,” while an equal number expect the forecasts to show just one or no cuts at all, according to the median estimate in a Bloomberg survey.
“The interest rate guessing game goes on,” said Chris Larkin at E*Trade from Morgan Stanley. “Even the friendliest inflation numbers probably won’t push the Fed to act any sooner than September.”
Whether it’s another move up or a dive down, traders are bracing for added volatility wrought by Wednesday’s dual macroeconomic catalysts: a report on consumer prices in the morning and the Fed’s rate decision in the afternoon.
The options market is betting the S&P 500 Index will move 1.25% in either direction that day, based on the cost of at-the-money puts and calls, said Stuart Kaiser, Citigroup Inc.’s head of US equity trading strategy. Should that pricing remain in place by Tuesday’s close, that figure would be the largest implied swing ahead of a Fed decision since March 2023, he added.
Investors remain too optimistic about the timing of a Fed-rate cut, according to RBC Capital Markets strategists led by Lori Calvasina.
The benchmark index could drop to 4,900 points if the Fed holds rates at current levels, inflation proves stickier than expected and the 10-year Treasury yield remains below 5%, the strategists wrote in a note.
If the central bank were to cut rates as expected, but earnings came in below projections, the S&P 500 would trade around 5,100 points — about 5% lower than current levels, Calvasina said. And the third — bearish — scenario sees the benchmark slumping almost 16% if stubborn inflation results in Fed rate hikes.
Corporate Highlights:
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Elliott Investment Management called for new leadership at Southwest Airlines Co. and an overhaul of its business strategy after revealing a $1.9 billion stake in the US carrier.
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Advanced Micro Devices Inc. was cut at Morgan Stanley, which said investor expectations for the chipmaker’s AI business “seem too high.”
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KKR & Co., CrowdStrike Holdings Inc. and GoDaddy Inc. will join the S&P 500 as part of its latest quarterly weighting change.
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Noble Corp., the world’s biggest offshore oil-rig contractor by market value, agreed to buy its smaller rival Diamond Offshore Drilling Inc. in a deal valued at $1.6 billion.
Key events this week:
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ECB’s Francois Villeroy de Galhau, Robert Holzmann and Philip Lane speak, Tuesday
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China PPI, CPI, Wednesday
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Germany CPI, Wednesday
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US CPI, Fed rate decision, Wednesday
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G-7 leaders summit, June 13-15
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Eurozone industrial production, Thursday
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US PPI, initial jobless claims, Thursday
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Tesla annual meeting, Thursday
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New York Fed President John Williams moderates a discussion with Treasury Secretary Janet Yellen, Thursday
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Bank of Japan’s monetary policy decision, Friday
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ECB’s Christine Lagarde and Philip Lane speak, Friday
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Chicago Fed President Austan Goolsbee speaks, Friday
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US University of Michigan consumer sentiment, Friday
Some of the main moves in markets:
Stocks
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The S&P 500 fell 0.2% as of 10:05 a.m. New York time
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The Nasdaq 100 fell 0.2%
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The Dow Jones Industrial Average was little changed
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The Stoxx Europe 600 fell 0.6%
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The MSCI World Index fell 0.3%
Currencies
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The Bloomberg Dollar Spot Index rose 0.3%
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The euro fell 0.6% to $1.0736
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The British pound was little changed at $1.2707
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The Japanese yen was little changed at 156.89 per dollar
Cryptocurrencies
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Bitcoin fell 0.4% to $69,417.51
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Ether fell 0.7% to $3,672.85
Bonds
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The yield on 10-year Treasuries advanced three basis points to 4.46%
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Germany’s 10-year yield advanced five basis points to 2.67%
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Britain’s 10-year yield advanced five basis points to 4.31%
Commodities
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West Texas Intermediate crude rose 0.7% to $76.09 a barrel
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Spot gold rose 0.4% to $2,303.37 an ounce
This story was produced with the assistance of Bloomberg Automation.
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