Bloomberg

The Wednesday Market Minute

  • Global stocks cautious heading into September Fed decision, with markets unnerved by yesterday's spiked in overnight lending rates.
  • Markets are expecting a 25 basis point rate cut from Chairman Jerome Powell at 2:00 PM Eastern time, but focus has already shifted to the Fed's forward guidance and the growing concern over banking funding stresses.
  • NY Fed will follow-up its first repo operation in ten years with another cash injection Wednesday as primary dealers struggle to borrow within the Fed's 2% to 2.25% target range.
  • Oil prices ease after Saudi Arabia pledges to have all production back on line by the end of the month, but US suggestions that Iran was behind Saturday's drone attacks keeps tensions in the region high.
  • Wall Street futures suggest modest opening bell declines for the the Dow ahead of August housing starts data at 8:30 am Eastern time.

Market Snapshot

Global stocks traded cautiously Wednesday, with investors focused on both the U.S. Federal Reserve's September rate decision later today in Washington and the impact of last weekend's attacks on two key Saudi oil facilities on world crude markets.

The Fed will announce it rate decision at 2:00 pm Eastern time, and although markets are pricing in a near-certain 25 basis point reduction in the central bank's key lending rate, the backdrop of surging global crude prices, slowing world economic growth, creeping inflation, Presidential pressure and -- most recently -- a worrying spike in bank funding markets, could hardly paint a more complicated backdrop for embattled Chairman Jerome Powell. 

In fact, the Fed's New York branch was forced yesterday to inject more than $53 billion in cash into gummed-up funding markets after overnight borrowing costs surged close to 10%, thanks in part to the hefty burden of primary dealers in taking down nearly $45 billion each day in gross U.S. Treasury bond issuance. 

The NY Fed will repeat its overnight repo operation -- the first in ten years -- later today, adding to market jitters as to what Powell and his colleagues are likely to say about future rate hikes, and the unwinding of the Fed's $3.8 trillion balance sheet, in the months ahead.

U.S. equity futures suggest understandable caution ahead of the Fed rate decisions, as well as Powell's press conference that follows at 2:30 PM Eastern time, with contracts tied to the Dow Jones Industrial Average indicating a 43 point opening bell decline and those linked to the S&P 500 guiding to a 4 point pullback for the broader benchmark.

FedEx Corp. (FDX - Get Report) shares were an notable early market mover, falling 11.7% after the world's biggest package delivery group warned that full-year profits would likely disappoint Wall Street as the U.S.-China trade war hives demand and the loss of a major contract with Amazon Inc. (AMZN - Get Report) eats into its bottom line.

The U.S. dollar index, which tracks the greenback against a basket of six global currency peers, was marked 0.2% higher at 98.47, while benchmark 2-year U.S. Treasury bond yields rallied 5 basis points to 1.705%. 

European stocks were modestly higher at the start of trading in Frankfurt, with the region-wide Stoxx 600 benchmark edging 0.1% into the green, while Britain's FTSE 100 bumped 0.1% higher as the pound eased to 1.2443 against the U.S. dollar following softer-than-expected August inflation data. 

One aspect of Powell's concern -- this week's surge in global crude prices and the inflationary impact it may have on U.S. consumer prices -- looks to have eased Wednesday, however, after Saudi Arabia's new Energy Minister said yesterday that the Kingdom expects oil output to return to normal levels by the end of this month before rising to just under 10 million barrels per day in October.

The pledge followed Saturday's attacks on two key facilities in the Kingdom, which U.S. intelligence suggests came from Southeast Iran and took out more than half of the Saudi's production capacity, sending crude to the highest levels in four months.

Oil prices tumbled around 6% yesterday, however, following the Saudi update on production and data from the American Petroleum Institute which showed a surprise -- albeit small -- increase in domestic U.S. crude stocks of 525,000 barrels.

Oil extends correction.

API on Tuesday reported a build of 0.592 million barrels in the U.S. crude oil inventories for the week ending Sept. 13

Venezuela crude inventories have swelled to more than 38 mn bbls.

Libya boosts capacity to its highest level since 2016. pic.twitter.com/zbUGt9PAMT

— Daniel Lacalle (@dlacalle_IA) September 18, 2019

Brent crude contracts for November delivery were seen 29 cents lower from their Tuesday close in New York at $64.26 per barrel in early European trading while WTI contracts for October were marked 50 cents lower at $58.84 per barrel.

Overnight in Asia, Japan's Nikkei 225 slipped 0.18% lower on the session, even as the yen eased to 108.21 against the U.S. dollar, after data showed the country's exports fell 8.2% in August, the ninth consecutive monthly decline that markets the longest streak of contraction in more than three years.

Elsewhere, the region-wide MSCI ex-Japan benchmark added 0.07% as stocks on the Shanghai Composite gained 0.43% into the close of trading, offsetting a 0.2% pullback for Australia's ASX 200.