S&P 500 Futures pare recent losses as yields retreat from multi-year high ahead of Fed

• Market sentiment remains dicey as traders await the key central bank decisions.
• S&P 500 Futures pare the biggest daily loss in a week.
• US 2-year Treasury yields ease from 15-year top, 10-year counterpart slips from 11-year high.
• Hopes of positive surprise from Fed weigh on sentiment, Asia-linked woes also challenge the mood.

The risk profile remains sluggish, after a bearish play, as markets brace for the hawkish central bank actions on early Wednesday. In addition to expectations of higher rates, pessimism surrounding China and Russia also favors the cautious mood.

While portraying the sentiment, the S&P 500 Futures lick its wounds near 3,880 after declining the most in one week the previous day whereas the US benchmark Treasury bond yields retreat from the multi-day high. That said, the US 2-year Treasury yields jumped to the highest level in 15 years while the 10-year counterpart also rose to the 11-year top during the pre-Fed cautious mood.

With the Fed’s 75 basis points (bps) rate hike already priced in, the latest chatters over the 1.0% rate lift seemed to have favored the risk-aversion. Nouriel Roubini, a well-known global economist, joined the league of Fed hawks on Tuesday. “The Fed started a two-day meeting on Tuesday, with rate futures traders pricing in an 83% chance of a 75 basis-point hike and a 17% probability of a 100 bps of tightening,” said Reuters.

Recently, Reuters reported that the Asian Development Bank (ADB) on Wednesday cut its growth forecasts for developing Asia for 2022 and 2023 amid mounting risks from increased central bank monetary tightening, the fallout from the war in Ukraine and COVID-19 lockdowns in China. On the same line is the news of a snap lockdown in the steel hub of Tangshan, due to China’s zero covid policy, which recently challenged the market sentiment and strengthened the safe-haven demand. Furthermore, headlines suggesting US Senators’ demand for secondary sanctions on Russian oil also appear to challenge the market’s risk appetite.

On Tuesday, mostly upbeat US housing data seemed to have propelled the yields and weighed on the market sentiment, in addition to the hawkish Fed bets and the geopolitical catalysts mentioned above. The nine-month downtrend in the US NAHB Housing Market Index precedes the Building Permits to 1.517M in August versus 1.61M forecast and 1.685M prior. However, Housing Starts improved to 1.575M compared to 1.445M market consensus and 1.404M previous readings.

Looking forward, traders will keep their eyes on the Federal Open Market Committee (FOMC) showdown as 0.75% rate hike is already given and a positive surprise is brewing. In addition to the rate moves, the economic forecasts and Fed Chair Powell’s speech will also be crucial for clear directions. Additionally, headlines surrounding China and Russia, as well as ECBSpeak are also among the catalysts that will entertain traders for the day.

Also read: Fed September Preview: Terminal rate projection is key