Earnings Fuel Stock Gains as Clock Ticks on Fed: Markets Wrap

(Bloomberg) -- The relentless rally in stocks pushed major U.S. benchmarks to their all-time highs just a day before the Federal Reserve’s policy decision.

Underpinning that strength is the fact that profit margins have held up incredibly well, despite soaring commodity prices and supply-chain snarls. Many companies have been able to pass through rising costs to consumers, with the majority beating earnings estimates. Regardless of what the Fed may say or do Wednesday, there’s a perception the U.S. will still have comparatively low rates, which bodes well for stocks.

“The fundamentals are very, very strong here and the backdrop is also very strong because we see economic growth delayed, not derailed into 2022,” Katie Nixon, chief investment officer for the wealth management business at Northern Trust, told Bloomberg Television. “The Fed is going to be on hold for longer than the market thinks. So it really is a constructive environment for risk assets.”

Treasury two-year yields joined a global slide in short-term rates that was unleashed by the Australian central bank’s dovish statement ahead of the Fed decision. With U.S. policy makers expected to start scaling back their asset-purchase program soon, economists surveyed by Bloomberg are closely divided on whether a rate liftoff will be next year or early 2023.

“The Fed has managed expectations perfectly in terms of preparing the markets for what is likely to be speed tapering,” said Win Thin, global head of currency strategy at Brown Brothers Harriman. “Most officials seem to agree that it’s better to get tapering over as quickly as possible in order to leave the Fed maximum flexibility to hike rates when needed.”

Some corporate highlights:

• Bed Bath & Beyond Inc. soared in late trading after announcing accelerated share buybacks and the launch of a new digital marketplace for merchandise from third-party producers. Lyft Inc. reported third-quarter revenue 73% higher than last year. T-Mobile US Inc. missed analysts’ subscriber-growth estimates.
• Pfizer Inc. climbed Tuesday after boosting its forecast for the year on the strength of its Covid-19 vaccine sales. It also projected 2022 revenue for the shot above analysts’ expectations.
• Avis Budget Group Inc. soared amid a flurry of retail-crazed activity as the rental-car company said it will play a big role in the adoption of electric vehicles in the U.S.
• Tesla Inc. slipped as billionaire Elon Musk cast doubt on Hertz Global Holdings Inc. plan to buy 100,000 electric vehicles and downplayed the deal’s potential.

After the recent rally in equities, technical indicators are signaling heightened volatility. Not only is the S&P 500 pushing the limits of its trading envelope -- built around moving price averages -- but the widening of its upper and lower bands can also be a precursor to greater swings. Furthermore, the gauge’s 14-day relative strength index is above 70, which is seen by some traders as a threshold for being considered overbought.

Here are some events to watch this week:

• Fed rate decision, U.S. factory orders and durable goods, Wednesday
• OPEC+ meeting on output, Thursday
• Bank of England rate decision, Thursday
• U.S. trade, initial jobless claims, Thursday
• U.S. unemployment, nonfarm payrolls, Friday

For more market analysis, read our MLIV blog.

Some of the main moves in markets:

Stocks

• The S&P 500 rose 0.4% as of 4 p.m. New York time
• The Nasdaq 100 rose 0.4%
• The Dow Jones Industrial Average rose 0.4%
• The MSCI World index rose 0.1%

Currencies

• The Bloomberg Dollar Spot Index rose 0.2%
• The euro fell 0.2% to $1.1581
• The British pound fell 0.4% to $1.3616
• The Japanese yen was little changed at 113.95 per dollar

Bonds

• The yield on 10-year Treasuries declined two basis points to 1.54%
• Germany’s 10-year yield declined six basis points to -0.16%
• Britain’s 10-year yield declined two basis points to 1.04%

Commodities

• West Texas Intermediate crude fell 0.6% to $83.51 a barrel
• Gold futures fell 0.4% to $1,789.10 an ounce

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