The Tuesday Market Minute

  • U.S. equity futures reverse earlier declines as ECB President Mario Draghi hints at a return of the Bank's controversial QE program just hours ahead of the Fed's rate-setting meeting.
  • CME Group futures suggest a 20% chance of a June rate cut, with the balances of bets suggesting the Fed will reduce its key target rate in July.
  • European stocks post solid gains as traders hope for fresh near-term stimulus, with benchmark 10-year bund yields hitting a fresh record low of -0.295%.
  • Global sentiment, however, remains tempered as investors react to a U.S. decision to move 1,000 troops into the Gulf region to counter "credible" threats from Iran.
  • Global oil prices slip for a third session as traders prefer to focus on weakening demand metrics and record U.S. production rates over regional military tensions and OPEC output cuts.
  • Wall Street futures suggest solid opening bell gains for the three major benchmarks ahead of May housing data at 8:30 Eastern time.

Market Snapshot

U.S. equity futures traded higher Tuesday, while European stocks reversed earlier declines, as investors reacted to comments from European Central Bank President Mario Draghi that suggested further monetary easing just hours ahead of the Federal Reserve's two-day policy meeting

Draghi laid the foundation for a potential re-opening of the Bank's controversial quantitative easing program Tuesday, telling a conference in Portugal that it has room to buy more bonds in order to stoke inflation in the currency area. 

The euro fell to a two-and-a-half week low of 1.1192 against the U.S. dollar immediately following Draghi's comments, while benchmark 10-year German bund yields, a proxy for risk-free interest rates in the region, fell to a fresh record low of -0.30%.

The region-wide Stoxx 600 benchmark, which had started the session with a 0.35%  decline, surged more than 1% to trade 0.77% to the upside following Draghi's speech in the resort town of Sintra, pulling  U.S. equity futures sharply higher as investors adjusted bets on Fed rate cuts.

Contracts tied to the Dow Jones Industrial Average are now indicating a 160 point gain while those linked to the S&P 500 are guiding to a 19.6 point advance ahead of key housing starts data at 8:30 am Eastern time as well as Redbook retail sales data shortly afterwards. Benchmark 10-year Treasury notes traded at a September 2017 low of 2.018%. 

Facebook Inc. (FB) - Get Report shares were a notable pre-market mover, extending gains for a fourth consecutive session Tuesday, taking their one-week gain past 10.8%, as investors react to details of its 'Libra' cryptocurrency plans revealed by its backers in a published white paper.

Prior to ECB President Draghi's speech, investors had been in a cautious mood, with weakening data at home and escalating military tensions in the Gulf weighing on global market sentiment.

Traders are still pricing in only a 20% chance of a rate cut tomorrow from Chairman Jerome Powell and the Fed's Open Markets Committee, with the balance of bets on a July move that would take the key target rate to a range of 2% to 2.25%.

However, a softer reading of the Empire State manufacturing index, which slipped to a 2.5 year low yesterday, as well as the ongoing impact on corporate profits from the lingering U.S.-China trade spat has pressured U.S. Treasury bond yields and the U.S. dollar, suggesting at least some chance of a Fed surprise tomorrow in Washington.

Investors were also preferring to take a cautious approach to the Tuesday session amid a worrying build-up of U.S. troops in the Gulf region, following a series of attacks on tankers travelling through the Strait of Hormuz last week and comments from Iran's Atomic Energy Organization yesterday that said the regime would soon breach limits on its enriched Uranium capacity, a move that would violate a 2015 accord aimed at thwarting its nuclear ambitions.

Acting U.S. Defense Secretary Patrick Shanahan said the U.S. would send at least 1,000 troops to the region to counter what he called "credible threats" from Tehran. 

Curiously, global oil prices have continued to decline since the U.S. first identified Iran as the source of attacks on shipping tankers in the Gulf last week, with investors opting to focus on weakening demand signals from China and elsewhere, as well as record rates of U.S. production, over supply concerns or military tensions.

Brent crude contracts for August delivery, the global benchmark, were seen 60 cents lower from their Monday close in New York and changing hands at $60.34 per barrel in early European trading, while WTI contracts for July, which are more tightly linked to U.S. gas prices, were marked 38 cents lower at $51.55 per barrel.

Britain's FTSE 100 was marked 0.6% higher in London, however, even as the pound bounced from a 2019 low of 1.2511 in overnight trading amid the ongoing leadership race to replace departing Prime Minister Theresa May and its implications for the U.K.'s impending exit from the European Union.

Overnight in Asia, stocks were slightly more positive, however, with gains in most major markets outside of Japan, including a modest 0.1% bump for the Shanghai Composite and a 0.47% advance for the Kospi benchmark in Seoul. The Nikkei 225 in Tokyo slumped 0.73% to 20,972.71 as the yen gained against the U.S. greenback.