Stocks are reeling as the euphoria over the Fed’s rate cut fades: markets are rallying

(Bloomberg) — U.S. stock futures fell Friday as bad earnings news dampened the euphoria surrounding the yield trajectory.

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Contracts on the S&P 500 fell 0.3%, with the underlying benchmark fresh off its 39th all-time high of 2024. FedEx Corp. fell 14% in premarket as the economic indicator missed earnings expectations and warned its business would slow. Nike Inc. rebounded when the company announced a change in CEO.

Europe’s Stoxx 600 index fell, while Mercedes-Benz Group AG fell as much as 8.4% after cutting financial forecasts due to sluggish sales in China. Treasury yields rose, while an index of dollar strength rose. Gold reached another record high.

The Federal Reserve’s bold half-point interest rate cut this week has boosted confidence that it can achieve a soft landing, but warnings like FedEx’s underscore the ongoing risks to the economy. Fed policymakers expect another half percentage point of cuts this year.

“For all the optimism in the markets right now, it’s clear there are still some concerns lurking beneath the surface,” said Jim Reid, a strategist at Deutsche Bank AG. “In particular, futures continue to price in a more aggressive pace of cuts than suggested by the Fed’s dot plot on Wednesday, so investors think they may need to accelerate those rate cuts if downside risks materialize.”

Traders are also prepared for the quarterly “triple witching,” when derivative contracts tied to stocks, index options and futures expire, potentially amplifying market moves. About $5.1 trillion will mature on Friday, according to an estimate from derivatives analytics firm Asym 500.

The expiration of the options coincides with the rebalancing of the benchmark indices. The event has a reputation for causing sudden price movements as contracts disappear and traders roll over their existing positions or start new ones.

The Bank of Japan was in the spotlight for keeping policy unchanged, with the yen falling 1.2% as Governor Kazuo Ueda proved less hawkish than some traders expected. Ueda indicated there is little urgency to raise rates, saying upside risks to inflation are declining.

According to Michael Hartnett of Bank of America Corp. Optimism in stock markets following the Fed’s move increases the risk of a bubble, making bonds and gold an attractive hedge against a recession or renewed inflation.

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The strategist said stocks are now pricing in more Fed easing and earnings growth of about 18% for the S&P 500 by the end of 2025. It doesn’t get much better than that in terms of risk, so investors are forced to chase the rally, Hartnett wrote in a note.

He also said that non-US stocks and commodities are a good way to achieve a possible soft economic landing, with the latter being an inflation hedge. International stocks are cheaper and are starting to outperform U.S. stocks, according to Hartnett.

Main events this week:

• Consumer confidence in the eurozone, Friday

• Retail sales in Canada, Friday

Some of the major moves in the markets:

Stocks

• S&P 500 futures fell 0.3% as of 7:56 a.m. New York time

• Nasdaq 100 futures fell 0.4%

• Futures on the Dow Jones Industrial Average were little changed

• The Stoxx Europe 600 fell 0.7%

• The MSCI World Index was little changed

Currencies

• The Bloomberg Dollar Spot Index rose 0.2%

• The euro was little changed at $1.1161

• The British pound was little changed at $1.3297

• The Japanese yen fell 1.1% to 144.27 per dollar

Cryptocurrencies

• Bitcoin rose 0.6% to $63,421.12

• Ether rose 3.2% to $2,545.3

Bonds

• The yield on ten-year government bonds rose by two basis points to 3.74%

• The German ten-year yield rose by one basis point to 2.21%

• The British ten-year yield remained little changed at 3.90%

Raw materials

• West Texas Intermediate crude fell 0.3% to $71.75 a barrel

• Spot gold rose 1.1% to $2,613.98 an ounce

This story was produced with the help of Bloomberg Automation.

–With help from Sagarika Jaisinghani and Divya Patil.

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