U.S. equities were hit by volatile trading on Wednesday before mostly finishing higher after the release of surprisingly hawkish Federal Reserve meeting minutes from the April policy meeting rattled investors. Policymakers noted that a June rate hike would be appropriate should second quarter economic data show a reacceleration of growth.
Futures traders increased the odds of a June interest rate hike from 4% to 28% as the Fed acknowledged that stable job gains and rebounding inflation will force the issue of policy tightening — no matter the temper tantrum from stimulus obsessed traders — despite concerns about consumer spending, the “Brexit” referendum and the situation in China.
This takeaway is reinforced by recent hawkish testimony by Fed officials talking up the odds of one or even two rate hikes this year vs. the one-and-done Wall Street was looking for. Watch for more from the Fed tomorrow when New York Fed President William Dudley and vice-chairman Stanley Fischer speak.
In the end, the Dow Jones Industrial Average lost a fraction, the S&P 500 gained a fraction, the Nasdaq Composite gained 0.5% and the Russell 2000 ended the day 0.5% higher. Treasury bonds weakened, the dollar was stronger, gold lost 0.2% and crude oil fell 1% to close at $47.81 a barrel.
Retailers were the weak spot again today, with Target Corporation (NYSE:TGT) down 7.6% on lower-than-expected comp-store sales growth and weak forward guidance.
Bank stocks led the way as the drop in Treasury bonds boosted long-term interest rates and thus net interest margins. The group gained 1.9%.
Tesla Motors Inc (NASDAQ:TSLA) gained 3.2% after analysts at Goldman Sachs upgraded the stock, but fell 1.3% after the close on the announcement of a $2 billion share offering to raise cash for the production of the Model 3 (on which Goldman is an underwriter).
Trading had a very technical element to it today, with the S&P 500 recovering from critical resistance near the 2,040 level but bouncing twice off of the intraday volume-weighted average price. The desperation kept the S&P 500 in the green for 2016 with a year-to-date gain of 0.2%. For 2016, the Nasdaq is down 5.4% while the Russell 2000 is down 2.9%.
The S&P 500 closed just above the 2,040 level for the ninth time in the last two months — indicative of just how vulnerable stocks are.
A breakdown from here would be violent, likely slicing right through the 2,000 level that was so important back in December, as investors realize the Fed is serious about more than one rate hike this year.
We are on the precipice of something very serious, which explains the rising interest in long volatility assets such as the Short-Term VIX (NYSEARCA:VXX) as shown above. Edge subscribers are braced for the worst with a position in the VelocityShares 2x VIX (NASDAQ:TVIX).
Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters. A two-week and four-week free trial offer has been extended to InvestorPlace readers.
