S&P500 Futures recover, yields soften as US default fears diminish

• Market sentiment improves as US policymakers appear optimistic about avoiding “catastrophic” default.
• S&P500 Futures ignore Wall Street’s losses to print mild gains, US Treasury bond yields retreat from two-week high.
• Hawkish Federal Reserve talks, upbeat US data challenge risk-on mood amid light calendar.

The market’s risk appetite solidifies on early Wednesday as traders remain hopeful of witnessing no US default. Adding to the consolidation mode could be a light calendar after a busy day, as well as cautious optimism among the US policymakers.

While portraying the mood, S&P500 Futures print mild gains around 4,135 and defy Wall Street’s downbeat performance whereas the US 10-year and two-year Treasury bond yields print the first daily losses in four by the press time. That said, the US Dollar Index (DXY) retreats to 102.57 following Tuesday’s 0.18% intraday gain to reverse the week-start losses. Furthermore, the Gold price rebounds from the lowest level in a fortnight whereas prices of Crude Oil and Natural Gas also portray the market’s cautious optimism.

US President Joe Biden and House Speaker Kevin McCarthy’s meeting renewed the market’s optimism that the US policymakers will be able to avoid the “catastrophic” default. Following the less-than one-hour-long meeting, congressional leaders, said, "It is possible to get a deal by the end of the week."  The optimism triggered a fall in the one-year US Credit Default Swap (CDS) spreads.

In addition to the US debt-ceiling concerns, Japan’s upbeat preliminary reading of the first quarter (Q1) 2023 Gross Domestic Product (GDP) figures, to 0.4% QoQ versus 0.1% expected and 0.0% prior, also favor the market sentiment as the Asian major reported notable growth after three quarters of sluggish economic performance.

On the contrary, the Federal Reserve (Fed) officials remain hawkish and prod the risk-on mood, especially amid upbeat US data. That said, Federal Reserve Bank of Chicago President Austan Goolsbee and Atlanta Fed President Raphael Bostic defended the US central bank’s hawkish moves by citing inflation woes as they spoke at a conference hosted by the Atlanta Fed late Tuesday.

Talking about the data, US Retail Sales improved to 0.4% MoM for April, from -0.7% prior (revised) versus 0.7% expected. More importantly, Retail Sales Control Group for the said month crossed market forecasts of 0.0% and -0.4% prior with 0.7% actual figure whereas Retail Sales ex Autos matches 0.4% MoM estimations for April¸ surpassing the -0.5% prior. Further, the US Industrial Production MoM rose to 0.5% for April versus expectations of printing a 0.0% figure.

Not only the Fed officials but policymakers from the European Central Bank (ECB) and Bank of England (BoE) also backed the hawkish moves of their respective central banks, which in turn underpin the recession fears and test the latest optimism.

Moving on, a light calendar may restrict the market moves on Wednesday but second-tier inflation and housing data from the US and Europe will join the BoE Governor Andrew Bailey’s speech to entertain the traders.

Also read: Forex Today: Higher US yields, risk aversion lead to a stronger US Dollar