Fundamental Analysis

Equities Finish Strong on Federal Reserve’s Dovish Tone

  • Dovish statements from Fed officials caused Treasury yields to drop.
  • Israeli air strikes devastated Gaza on Tuesday.
  • Traders estimate an 86% likelihood of Fed rates staying unchanged in November.

US equities ended higher on Tuesday, marking their third consecutive day of gains. This rise followed dovish statements from US Federal Reserve officials, which caused Treasury yields to drop. At the same time, investors were cautiously monitoring the situation in the Middle East.

Atlanta Fed President Raphael Bostic asserted that there was no need for the central bank to raise interest rates further. Fed Governor Christopher Waller reiterated the central bank’s commitment to lowering inflation to the 2% target.

Meanwhile, Minneapolis Federal Reserve Bank President Neel Kashkari predicted that the US economy was on track for a soft landing, with inflation returning to the Fed’s 2% target and no sharp increase in the unemployment rate. However, he cautioned that if yields increased due to shifting expectations about Fed policy, the central bank might need to act accordingly to maintain those yields.

On Tuesday, the 10-year Treasury yield retreated from its 16-year peak, posting its most significant single-day decline since August.

According to CME’s FedWatch tool, traders estimated an 86% likelihood of interest rates staying unchanged in November and a 73% probability for December.

Elsewhere, Israeli air strikes devastated Gaza on Tuesday in a retaliatory move for a series of deadly Hamas attacks over the weekend. 

“Everyone’s watching the Middle East conflict and bond yields. The decrease in bond yields is currently the primary driver,” commented John Praveen, the managing director and co-chief investment officer at Paleo Leon.

While the Fed’s dovish remarks bolstered stock markets on Tuesday and investors remained optimistic about the Middle East situation, Praveen warned that this sentiment could change if the conflict extended to other regional nations. 

Later in the week, investors will focus on inflation data, including September producer and consumer prices and the release of the Fed’s September meeting minutes. The third-quarter earnings season starts in earnest on Friday.

Stoxx 600 daily performance (Source: Bloomberg)

Stoxx 600 daily performance (Source: Bloomberg)

European equities surged on Tuesday, posting the biggest gains in almost a year, due to dovish statements from US Federal Reserve and European Central Bank (ECB) officials. This rebound occurred just one day after concerns over the Middle East conflict led to a rush for safe-haven assets.

ECB policymaker Francois Villeroy de Galhau expressed confidence that inflation would still reach the ECB’s target of approximately 2% by the conclusion of 2025, despite the ongoing Middle East conflict.