S&P 500 eyes record high as interest rate cut hopes underpin sentiment

What’s driving markets

The S&P 500 was set to open Tuesday’s session only about 1% below its record close as traders remained energized by the prospect of the Federal Reserve starting to cut interest rates by the spring of next year.

Some Fed officials in recent days pushed back against the market’s hopes for lower borrowing costs as early as March, but equity investors seem to have shrugged off those comments, for now.

Meanwhile, the Bank of Japan on Tuesday reminded traders that an important spigot of cheap money still remains open. The BOJ left its main interest rate at minus 0.1%, and in the accompanying news conference, Governor Kazuo Ueda provided little evidence he was minded to exit the central bank’s ultra-loose monetary policy anytime soon, despite inflation running above its 2% target for 19 consecutive months.

The Japanese yen
USDJPY,
+1.26%
fell 1.2% and the Nikkei 225 stock index
JP:NIK
rose 1.4% as 10-year government bond yields
BX:TMBMKJP-10Y
fell 3.6 basis points to 0.634%, the lowest in nearly four months.

“Whenever central banks take positions that the market thinks are unsustainable, it’s always the currencies that play the role of the canary in the coal mine. No surprise then to see the Yen weakening by around 1% against every major currency overnight as investors vote with their feet,” said Steve Clayton, head of equity funds at Hargreaves Lansdown.

Traders were also warily eyeing the oil market, after benchmark Brent crude
BRN00,
-0.32%
jumped on Monday following BP’s statement it was halting shipments through the Red Sea, and thus the Suez Canal, because of attack’s by the Houthi in Yemen.

Many of the world’s biggest shipping companies have said they also will steer clear of the region, prompting concerns about rising costs that may build inflationary pressures.

“An extended period of disruption in global trade ways should not only sustain energy prices, but also put a renewed pressure on global supply chains and shipping prices,” said Ipek Ozkardeskaya, senior analyst at Swissquote Bank.

Read: Attacks in the Red Sea add to global shipping woes

“The latter is a threat to inflation. Remember, the pandemic-related supply chain disruptions were the major reason that sent inflation to almost 10% in the U.S.,” Ozkardeskaya added.

However, there was little evidence early Tuesday that investors were overly concerned by that narrative, with 10-year U.S. Treasury yields
BX:TMUBMUSD10Y
dipping 2.7 basis points to 3.912%.

U.S. economic updates set for release on Tuesday include November housing starts and building permits at 8:30 a.m. Eastern.

Atlanta Fed President Raphael Bostic is due to speak at 12:30 p.m.