U.S. equities moved lower on Tuesday as the big two-day Federal Reserve policy meeting rolls on into Wednesday.
Investors remain concerned about rising odds of a “Brexit,” which is pushing down government bond yields worldwide. Today, German bunds traded with a negative yield for the first time ever. According to Fitch, the volume of global government bonds trading with negative yield has crossed the $10 trillion mark for the first time — representing about 20% of total.
Worries that the Fed will be pushed to raise rates in July or September is exacerbating this dynamic — on concerns this would be a policy mistake. As a result, safe havens are receiving a nice bid, not only T-bonds but precious metals and volatility as well.
In the end, the Dow Jones Industrial Average lost 0.3%, the S&P 500 Index lost 0.2%, the Nasdaq Composite shaved 0.1% and the Russell 2000 ended the day 0.3% lower. The dollar was stronger, gold gained 0.1% for its fifth consecutive rise, and gold dropped 0.8% to close at $48.48 a barrel.
Defensive telecom and utility stocks led the way with gains of 0.5%. Financial stocks were the laggards, losing 1.5%, as a drop in long-term government bond yields pinch net interest margins. Wall Street banks are getting hit hard as a result, with Goldman Sachs Group Inc (NYSE:GS) losing 1.6% to push the July $150 puts to a gain of nearly 50% for Edge Pro subscribers.
Twitter Inc (NYSE:TWTR) gained 5.6% on the back of M&A hopes, with chairman Omid Kordestani saying any offer would be evaluated. Alibaba Group Holding Ltd (NYSE:BABA) gained 3.1% on better-than-expected guidance.
Turning back to Brexit, the “Leave” campaign continues to enjoy a surge in the polls: A TNS poll showed a seven-point advantage while The Sun, the United Kingdom’s largest newspaper, official endorsed Brexit as a way to escape the dictatorial bureaucracy of Brussels. Central bankers are responding to the rising odds, with the European Central Bank, the Bank of England and the Bank of Japan all reportedly preparing to quell market volatility.
Federal Reserve Board Chair Janet Yellen is sure to mention these concerns in her post-announcement press conference tomorrow.
The Fed is likely to stick to its two-quarter-point rate hike forecast, with moves in July/September and December penciled in, amid evidence of ongoing labor market tightening and building evidence of wage inflation.
Yellen must walk a thin line between expressing confidence in the economy, but not shocking liquidity-addicted markets.
As time goes on, this becomes harder and harder to do.
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.
