Market Snapshot: U.S. stock futures show Wall Street struggling to regain footing after Fed fears prompt sharp pullback

What’s driving markets

The recent summer surge in U.S. stocks was still looking fragile on Tuesday. After rallying more than 17% from its mid-June low on hopes the Fed may slow its monetary policy tightening cycle, the S&P 500 index has struggled to maintain its advance over the past several sessions.

The S&P 500 closed at a three-month high on Aug. 16 but has lost 3.9% since then “amid a toxic cocktail of fears around inflation, possible recession and further shortages of energy supplies,” said Richard Hunter, head of markets at Interactive Investors.

“There is perhaps a growing realization that the Federal Reserve will remain unmoved by recent data which suggested that inflation could be peaking and maintain its aggressive policy,” Hunter added.

Ipek Ozkardeskaya, senior analyst at Swissquote Bank, noted that ahead of the Fed’s Jackson Hole symposium starting on Thursday, investors had become more wary that Chairman Jay Powell will seek to cement his hawkish stance.

“Now that the Jackson Hole meeting approaches, those [bullish stock market] bets are vanishing, as there is no way the Fed will soften its tone while inflation still hangs around the 8.5% level,” Ozkardeskaya said in a morning note.

Much of the equity market’s recent rally has been predicated on lower long-term borrowing costs, but benchmark 10-year Treasury yields
TMUBMUSD10Y,
3.021%,
which nearly fell below 2.5% two months ago, were back above 3% as the market adjusts its Fed narrative.

Such moves, alongside rises in overnight and short-duration U.S. bond yields are also boosting the dollar index
DXY,
-0.02%,
which is again flirting with 20-year highs. This was putting further pressure on stocks because it makes U.S. goods and services less competitive abroad and diminishes companies’ repatriated earnings.

Another factor causing angst among investors of late is the Russia-induced sharp rise in natural gas prices across Europe that have raised concerns the continent will fall into a steep recession this winter.

Traders were noting that a similar dynamic, though nowhere near the same extreme, is evident in the U.S. where the Nymex natural gas future
NG00,
+1.81%
on Tuesday jumped above $10 per million British thermal units for the first time since 2008.

U.S. economic data set for release on Tuesday include the August purchasing managers’ manufacturing and services indices due at 9:45 a.m. Eastern and July new home sales at 10 a.m. Eastern.

How are other assets faring

• Oil futures were higher with U.S. crude
  CL.1,
  +1.53%
  adding 1.5% to $91.58 a barrel.

• Gold
  GC00,
  +0.05%
  is up 0.3% to $1,753 an ounce.

• Bitcoin
  BTCUSD,
  +1.40%
  advanced 1.7% to $21446.

• Asia markets fell back in tandem with Wall Street’s overnight decline. Japan’s Nikkei 225
  NIK,
  -1.19%
  fell 1.2% and Hong Kong’s Hang Seng
  HSI,
  -0.78%
  shed 0.8%. In Europe, the Stoxx 600
  SXXP,
  -0.31%
  recovered much of its early losses to trade down 0.1%.