The stock market was falling Tuesday as a surge of Covid-19 cases in Europe hit sentiment, while investors continued to consider how the renomination of Jerome Powell to lead the Federal Reserve could shift the outlook for rate increases.
Futures for the Dow Jones Industrial Average indicated an open 40 points lower, after the index edged up 17 points Monday to close at 35,619. Futures for the S&P 500 and Nasdaq signaled a similar start, after both indexes took a sharp turn downward at the end of Monday trading.
The renomination of Jerome Powell as Chair of the Federal Reserve has prompted investors to bring forward their expectations of when the central bank will first hike rates. Under Powell, who promised in a press conference with President Joe Biden to focus on fighting inflation, markets see an initial rate increase around to June 2022.
Powell was viewed as the favorite to lead the central bank for the next four years, while runner-up Lael Brainard—a Fed Governor who has been nominated as Vice Chair—was viewed as someone who would lead the Fed in a more dovish direction.
“Quite how the market is reading so much into this reappointment is kind of hard to work out,” said Neil Wilson, an analyst at broker Markets.com.
“Bond yields ticked up, with the policy-sensitive two-year note rising to its highest since March 2020; the dollar rose to a new 16-month high and has held gains as of this morning; gold tumbled as yields climbed; financials and energy rose and tech stocks fell, dragging the broad market lower,” Wilson said.
Compounding considerations of rate increases—and inflation fears that simmer under the surface—stocks have also been hit by a resurgence of Covid-19 in Europe, where Austria headed into a new national lockdown Monday. In Germany, the region’s largest economy, Chancellor Angela Merkel said the current surge in coronavirus infections is worse than anything the country has seen so far in the pandemic.
“A winter Covid-19 wave, energy supply concerns, and inflation worries are all potential sources of volatility in the months ahead,” said Mark Haefele, the chief investment officer at UBS Global Wealth Management. “But equity markets’ relatively calm reaction suggests a willingness to look through these factors, given also a consensus view that they all are still short-lived.”
Oil markets are also under pressure amid expectations that the U.S. will release crude from its strategic reserve, potentially as part of a joint announcement with other countries. Biden, who has recently turned his attention to rising inflation, could announce the move in a speech on the economy Tuesday.
“This could help put some downward pressure on inflation, but as recent releases have shown, price gains have been broadening out over the last couple of months to a wider swath of categories, so it remains to be seen how helpful this will prove,” said Jim Reid, a strategist at Deutsche Bank.
Reid also noted that much will depend on how the OPEC+ group of oil-producing countries—including Saudi Arabia and Russia—will react. “For their part, OPEC+ members noted that the moves from the U.S. and its allies would force them to reconsider their production plans at their meeting next week,” the strategist said.
Futures for international oil benchmark Brent were down 1% to below $79 a barrel, after trading above $82 at the end of last week. U.S. futures for West Texas Intermediate crude were down 1.3% to around $75.70.
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