U.S. equities finished strongly higher on Wednesday, led by both a roaring Nasdaq Composite and small-cap-focused Russell 2000 as some of the recent central bank hawkishness was walked back overnight courtesy of the European Central Bank. Officials felt compelled, after some inter-asset volatility, to clarify that ECB chief Mario Draghi’s comments yesterday — saying factors weighing on inflation were temporary amid an upbeat assessment about the economy — were misjudged.
Reuters cited sources that said Draghi intended to signal tolerance for a period of weaker inflation; not an imminent policy tightening. That was all it took for risk appetites to be restored.
In the end, the Dow Jones Industrial Average gained 0.7%, the S&P 500 gained 0.9%, the Nasdaq Composite gained more than 1.4% for its best day of the year, and the Russell 2000 gained 1.5%. Treasury bonds weakened, the dollar ended lower, gold gained 0.2%, and crude oil gained 1.1% on a drop in gasoline inventories. Oil output also fell the most since August 2016, amid speculation the decline is being driven by Tropical Storm Cindy.
Treasury bonds weakened, the dollar ended lower, gold gained 0.2% and crude oil gained 1.1% on a drop in gasoline inventories. Oil output also fell the most since Aug. 2016, amid speculation the decline is being driven by Tropical Storm Cindy.
Breadth was heavily positive — amid an atmosphere of relief buying — with advancers outpacing decliners by a 3.1 to 1 ratio on the NYSE with volume at 85% of the 30-day average. Financials led the way with a 1.6% gain while utilities were the laggards, on account of their yield sensitivity, falling 1%.
Staples, Inc. (NASDAQ:SPLS) gained 8.4% on reports it’s nearing a deal to be acquired by Sycamore Partners. KB Home (NYSE:KBH) gained 5% on a quarter earnings beat with revenues 7% ahead of estimates. And General Mills, Inc. (NYSE:GIS) gained 1.6% as expense control boosted earnings.
The gain in financials was notable, as the sector has been mired in a sideways consolidation since December. But the Financial Select Sector SPDR Fund (NYSEARCA:XLF) looks ready for a retest of its early March high — setting the stage for an upside breakout.
Investors are being encouraged by solid capital adequacy “stress test” results from the Federal Reserve as well as some relief to net interest margins from the rise in long-term yields over the past 24 hours.
But the pullback in yields looks temporary as fundamental headwinds continue to build as the economic data disappoints on a scale not seen since 2011. Stocks remains oblivious, focusing solely on the ongoing flow of central bank asset buying in Japan and Europe.
But the recent turn of hawkishness from the Fed, which is growing increasingly concerned about the financial stability risks from the stock market’s relentless rise, will eventually rattle the bulls back to reality.
Check out Serge Berger’s Trade of the Day for June 29.
Today’s Trading Landscape
To see a list of the companies reporting earnings today, click here.
For a list of this week’s economic reports due out, click here.
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