Wall Street Slumps as Dow Leads Decline Amidst Rising Yields and Oil Prices, Fed Rate Actions in Focus | Daily Market Analysis

Key events:  

• USA - S&P Global Services PMI (Aug)  
• USA - ISM Non-Manufacturing PMI (Aug)  
• USA - ISM Non-Manufacturing Prices (Aug)
• Canada - BoC Interest Rate Decision

On Tuesday, Wall Street's primary stock indices closed in negative territory, with the Dow leading the decline. This was driven by rising Treasury yields and oil prices, while investors were assessing the Federal Reserve's future interest rate actions.

The previous week had seen all three major US stock indices posting gains on expectations of a more dovish stance from the Federal Reserve. However, that optimism had waned by Monday.

US Treasury yields increased following robust economic data and comments from Fed Governor Christopher Waller, who suggested that there might not be a need to change interest rates anytime soon.

In the Canadian market, energy stocks and battery metals experienced upward momentum, but this was offset by weakness in the telecom, utilities, and base metals sectors. The Canadian dollar traded at 73.38 cents US, a slight decrease from its Friday value of 73.64 cents US.

The Bank of Canada was expected to maintain its key rate in Wednesday's announcement, but there was speculation about whether the central bank had concluded its rate-hiking cycle. Brianne Gardner, senior wealth manager at Velocity Investment Partners, believed the rate-hiking cycle might be over but anticipated a "wait and see" approach from the bank regarding future hikes.

In Europe, stock markets were expected to open lower on Wednesday due to weak German factory orders and rising oil prices, contributing to global growth concerns.

Germany's DAX futures contract traded 0.2% lower, France's CAC 40 futures dropped 0.3%, and the FTSE 100 futures contract in the UK fell 0.3%.

Data released on Wednesday revealed that German factory orders had declined by 11.7% in July, reversing the previous month's 7.0% gain. Excluding large orders in the aerospace sector, overall monthly activity would have seen a 2.6% decline.

This decline in July continued to paint a bleak picture for the industrial sector of the eurozone's largest economy.

Manufacturing data from Germany, Britain, and the euro area showed declines on Tuesday, with their service sectors also slipping into contraction.

In addition, a private-sector survey indicated that China's services activity had expanded at its slowest pace in eight months in August.

Looking at the broader eurozone, retail sales were expected to have weakened in July, reflecting ongoing consumer pressure due to elevated inflation.

Data scheduled for release later in the session were anticipated to show a 0.1% monthly drop in July retail sales, marking a 1.2% annual decline.

These soft economic indicators have raised the likelihood that the European Central Bank will consider pausing its rate-hiking cycle at its upcoming meeting next week.

On Wednesday, the US dollar remained close to a six-month high as concerns about China's economic situation and global growth dampened risk appetite.

Meanwhile, the Japanese yen approached a 10-month low, prompting strong warnings from Japan's top currency diplomat since mid-August.

The yen exhibited a 0.19% strengthening, reaching 147.42 per dollar during Asian trading hours. However, it was in proximity to 147.82, the lowest level since November 4, which it touched earlier in the session. The Japanese currency has been hovering around the critical 145 per dollar threshold for the past few weeks, leading traders to closely monitor indications of potential intervention by Tokyo.

In the realm of precious metals, gold prices exhibited limited movement during Asian trading on Wednesday. This lack of momentum was attributed to the dollar's overnight strength and rising Treasury yields. While gold had made a significant recovery from five-month lows over the past couple of weeks, it encountered difficulties in making further progress due to the resurgence in the dollar and yields.

Market participants are now eagerly awaiting additional insights into US monetary policy from several Federal Reserve officials this week. The series of speeches begins with Dallas Fed President Lorie Logan on Wednesday.

Chicago Fed President Austan Goolsbee, along with members of the Fed's Open Market Committee, John Williams and Michelle Bowman, are scheduled to deliver speeches on Thursday.

These addresses are occurring just before a communication blackout by the Fed in anticipation of a two-day meeting on September 19 and 20. The central bank is widely expected to maintain its current interest rates, given recent indications of a cooling economic environment.

However, it is anticipated that the Fed will uphold its hawkish stance, primarily due to persistent inflationary pressures and a robust labor market. This expectation is likely to exert downward pressure on gold and other metals for the remainder of the year.