Dow posts best start to June since 1940 amid trade optimism, Fed meeting

 

U.S. stocks jumped Tuesday as investors anticipated renewed U.S.-China trade talks and looser monetary policy from the Federal Reserve.

The S&P 500 (^GSPC) rose 0.97%, or 28.08 points, as of market close. The Dow (^DJI) rose 1.35%, or 353.01 points, holding onto gains after President Donald Trump signaled trade talks with China would continue in the near-term. The Nasdaq (^IXIC) rose 1.39%, or 108.86 points.

As of market close Tuesday, the Dow was up 6.65% in June, the best start to the month since the June of 1940, when the index was up 6.92%.

Stocks took a leg higher Tuesday morning after President Donald Trump wrote in a Twitter post that he “had a very good telephone conversation with President Xi [Jinping] of China.” He added that the U.S. and Chinese delegations would begin discussions prior to the G20 summit in Japan later this month.
Meanwhile, members of the Federal Open Market Committee (FOMC) begin two days of meetings Tuesday and are set to produce a statement and press conference Wednesday to relay their outlook on the domestic economy and monetary policy decision.

While market participants have priced in the outcome of no change to the target band for benchmark interest rates by the end of this month’s meeting, they widely expect that Fed Chair Jerome Powell and his colleagues will use this meeting to lay the groundwork for a rate cut later this summer.

“Chair Powell will have to walk a fine line at his press briefing, maintaining confidence in the outlook while simultaneously acknowledging increased risks and vulnerability,” Sam Bullard, Wells Fargo managing director and senior economist, wrote in a note.
Domestic economic data released earlier this week surprised to the downside, helping to support calls for a near-term rate cut. The New York Empire State manufacturing index posted its largest drop on record for May, and the National Association of Homebuilders’ May sentiment survey posted its first decline in 2019.

Other global central bankers have cleared the way for further stimulus to help prop up their respective economies amid dampened growth.

European Central Bank President Mario Draghi signaled on Tuesday that the central bank could take additional measures to support softening eurozone economies. The ECB earlier this month already revised its forward guidance to see interest rates at present levels at least through the first half of 2020, marking an extension from prior guidance. The ECB’s interest rates on its marginal lending facility and deposit facility are currently at 0%, 0.25% and -0.40%, respectively.
“In the absence of improvement, such that the sustained return of inflation to our aim is threatened, additional stimulus will be required,” Draghi said in prepared remarks at a forum in Sintra, Portugal. “Further cuts in policy interest rates and mitigating measures to contain any side effects remain part of our tools.”

European stocks surged and U.S. and European government bond yields fell after Draghi’s comments. The yield on the U.S. 10-year Treasury note slid to as low as 2.0148% as of 7:56 a.m. ET, according to Bloomberg data.

Sentiment has deteriorated for many traders amid ongoing global concerns, according to a new report from Bank of America Merrill Lynch. Global equity allocations posted the second biggest one-month drop on record, according to the June survey, and average cash balances jumped the most since the debt ceiling crisis in 2011. A record high of 87% of investors surveyed said the global economy was in the late cycle, according to BAML.

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