S&P 500 Futures Steady After Selloff Rattles Globe: Markets Wrap

The selloff on Wall Street showed signs of abating even as investors grappled with the threat of higher-for-longer interest rates and an Israeli counter-strike.

US equity futures ticked higher, signaling a recovery after the S&P 500 fell more than 1% in the past two sessions. Two-year Treasuries approached 5%. The dollar advanced for a fifth day, its longest run since January.

Economic data continues to underscores US economic strength while conflict in the Mideast fans the risk of higher energy prices and inflation, frustrating hopes for imminent Federal Reserve interest rate cuts. With earnings season underway, there’s growing concern that the mega-cap leaders will struggle to justify their steep valuations.

“Markets are looking for an excuse to take a breather and the combination of rising geopolitical risk alongside inflation fear and Fed anxiety is providing some decent ground for that,” said Florian Ielpo, head of macro research at Lombard Odier Asset Management.

Traders are no longer fully pricing in a Fed rate cut before November, while UBS Group AG strategists warned there may be no pivot at all and that US policymakers will instead embark on a hiking cycle. Treasury 10-year yields have spiked more than 10 basis points to 4.65% since the start of the week.

With stocks and bonds coming under pressure, the dollar pushed higher as investors piled into haven assets. Top Israeli military officials have vowed to respond to Iran’s missile attack despite diplomatic calls for restraint.

Recent data “has given the Fed pause for thought and the market has repriced quite significantly,” said Daniel Loughney, head of fixed income at Mediolanum International Funds. “We have a powerful dynamic whereby US growth and inflation dynamics are mingling with big-picture commodity and supply chain-related inflationary pressures.”

Meanwhile, stocks outside the US were trading in the red, with equities in Europe tumbling 1.2% and Asian peers down 2%.

This year’s record rally has left markets especially vulnerable to a pullback, according to top Wall Street strategists.

A survey from Bank of America Corp. found that investor allocation to equities is at the highest in over two years. Citigroup strategists counted $52 billion of long positions on the S&P 500, 88% of them loss-making.

“Should the market turn negative, the move could be faster and larger due to the large, long positions already in the red,” Citigroup strategist Chris Montagu wrote in a note.

Read more: Wall Street Strategists Say Stocks Pullback Risks Forced Selling

Among individual movers, Tesla Inc. fell as much as 2.6% in premarket trading as two of the electric carmaker’s top executives left in the carmaker’s largest-ever round of job cuts. Morgan Stanley rose 3% in the premarket after reporting wealth management net revenue for the first quarter that beat the average analyst estimate. Its equities trading revenue was also ahead of consensus.