By CCN: Dow Jones futures carved out a spirited triple-digit rally in early trading on Tuesday as the market priced in a more dovish Federal Reserve policy.
Traders now expect a series of interest rate cuts at the Fed beginning as soon as July. One billionaire investor said the Fed could even slash the fund rate to zero in the next 18 months.
The dovish shift is a response to recession alarm bells and the adverse effects of the US-China trade war.
Dow Futures Fight to Triple-Digit Rally
The Dow Jones Industrial Average (DJIA) looks set to open in positive territory on Tuesday, with DJIA futures pushing 142 points higher (0.57 percent) at 6.25 am ET.
S&P 500 futures followed a similar pattern, storming 14.75 points higher (0.54 percent) to hit 2,764. After a heavy sell-off in Monday’s trading session, Nasdaq futures also point to a strong open as futures rose 45.25 points (0.65 percent) to 7,039.
It marks an impressive rally while Asian markets slumped overnight.
Fed rate cut to zero in 18 months?
As CCN reported, traders are now pricing in a 68 percent chance of a rate cut in July. That’s up from just 20 percent last month.
“The market is increasingly convinced the Fed will cut. The only question is how soon, and by how much” - Mark Cabana, Bank of America Corp.
Billionaire wealth manager Stan Druckenmiller sees the Fed acting even faster. In an interview with Bloomberg, he sees a future where the Fed slashes the funds rate to zero within the next 18 months, unless economic data picks up.
Dow Jones: a miserable month of May
Traders are rethinking the rate cut probability after a month of crippling losses on the Dow Jones. Wall Street is screaming recession warnings, and trade negotiations with China completely broke down. Treasury yields have also dropped as investors lose confidence in the economy.
Easing the federal funds rate is one weapon the Fed can use to inject stimulus into the US economy. Historically, rate cuts help buoy the Dow Jones by giving companies access to cheaper loans. As CCN reported, easing monetary policy would lower the chance of all-out stock market collapse.
St. Louis Fed President James Boullard, who has voting rights on the Federal Open Market Committee, said a rate cut is needed “soon” to counter the adverse affects of the trade war.
No end in sight for trade war
Druckenmiller backed up his zero rate prediction with a pessimistic analysis of the trade war. He said Trump is unlikely to back down before the 2020 election. The threat of tariffs plays too well with his base and he’ll need that weapon to fight for re-election.
In a sign of deteriorating relations, China this morning warned its citizens from traveling to the US. Citing shootings, robberies, and harassment towards foreigners, China issued a warning to those working, studying, or traveling to the US.
Trade war fears hit the market hard in May, but the promise of interest rate cuts could inject some much-needed optimism back into the market. Fed Chairman Jerome Powell is due to speak in Chicago today and may offer further clues.