U.S. Federal Reserve Chairman Jerome Powell gave a speech in Rhode Island yesterday and, afterwards, was asked whether the Fed was keeping an eye on the markets. His reply contained six words that investors didn’t want to hear: “Equity prices are fairly highly valued.”
The S&P 500 lost 0.55% on the day. Markets in the U.K. and Europe are all down this morning. The picture is mixed: Asia largely had a good day and U.S. futures are marginally up, so it’s not a tsunami.
Powell’s remarks weren’t controversial.
Everyone knows that most major indexes have hit record highs this year. But it is clear that investors are wary of any sign that the Fed thinks “irrational exuberance”—as former Fed chair Alan Greenspan once called it—has kicked in. That would be a point at which the Fed could be expected to start raising interest rates in order to pierce an economic bubble. And that would be bad for stocks.
Powell said: “We do look at overall financial conditions, and we ask ourselves whether our policies are affecting financial conditions in a way that is what we’re trying to achieve … But you’re right, by many measures, for example, equity prices are fairly highly valued.”
UBS’s Paul Donovan interpreted it this way: “Powell apparently just wants investors’ confidence to be somewhat less certain.”
One thing they are not confident about is tech stocks. The Nasdaq Composite lost nearly a full percentage point yesterday as traders expressed skepticism over Nvidia’s $100 billion investment in OpenAI. “There were as many questions as answers” about the deal, according to a note from Jim Reid and the team at Deutsche Bank this morning. A number of analysts are questioning how sustainable the AI boom is. Nasdaq futures are up this morning, premarket, however.
Why are futures rising when the underlying indexes lost ground yesterday? Because the broad thrust of Powell’s speech contained worries about the softening labor market—which implies the Fed will stay on its rate-cutting path in the near-term.
Here’s snapshot of the markets ahead of the opening bell in New York this morning:
S&P 500 futures were up 0.17% this morning. The index closed down 0.55% in its last session.
STOXX Europe 600 was down 0.28% in early trading.
The U.K.’s FTSE 100 down 0.12% in early trading.
Japan’s Nikkei 225 was up 0.3%.
China’s CSI 300 was up 1.02%.
The South Korea KOSPI was down 0.4%.
India’s Nifty 50 was down 0.22% before the end of the session.
Bitcoin declined to $112.5K.
