Stocks fall; Aussie dollar soars after surprise hike

Global shares fell on Tuesday, as caution set in ahead of the Federal Reserve’s upcoming policy meeting, while bumper profits at Europe’s biggest bank gave financial stocks a boost.

The Australian dollar soared after the central bank stunned markets with a surprise interest-rate hike, while in U.S. markets, short-dated government bond yields shot up after the Treasury Department said it could run out of the cash it needs to pay its bills by early June.

The Fed is expected to raise interest rates by a quarter of a point on Wednesday, but with so much anxiety around the tug-of-war over the government’s debt limit, as well as the stability banking sector after the failure of a third U.S. lender in two months, money markets show investors think this will be the last hike.

“No one is going to want to do too much before we get to that FOMC decision. It’s a case of positions being placed in advance of that Fed meeting,” TraderX strategist Michael Brown said.

“Equities look to be retracing a bi today, the fact that we couldn’t convincingly break 4,200 (on the S&P) is a bit of a concern for the bulls and that may strengthen the dollar marginally,” he said.

S&P 500 futures eased 0.1%, while blue chip stocks in Europe declined. The STOXX 600 fell 0.25%, as gains in the banking sector after HSBC delivered bumper profits, were offset by losses in oil and gas shares following BP (NYSE:BP)’s decision to pare back its share buyback programme.

In the currency markets, the Aussie dollar was the standout performer, rising by as much as 1.3% after the Reserve Bank of Australia’s decision to raise interest rates, having indicated at its last policy meeting that it may not tighten monetary policy any further.

“One of the things that sticks out to me is that they’re still saying they might need to increase interest rates,” said Commonwealth Bank of Australia (OTC:CMWAY) strategist Joe Capurso.

“So as well as the increase today, that’s supporting the Aussie dollar,” he said. That could unwind, he said, as there’s a “reasonable chance” the Federal Reserve takes a similar approach at its meeting on Wednesday.

The dollar fell 0.1% against a basket of major currencies, while the euro held steady at $1.0974.

Overall, the mood in the market was fraught. U.S. President Joe Biden on Monday summoned the four top congressional leaders to the White House next week after Treasury Secretary Janet Yellen said the Treasury might run out of money to cover obligations as soon as June 1.

U.S. credit default swaps – which reflect the cost of insuring against a default – were trading at their highest in years on Tuesday, while yields on one-month Treasury bills neared their highest since 2007.

The risk of the U.S. government actually running out of money is low, TraderX’s Brown said, but that hasn’t stopped traders from preparing for such an eventuality.

“The problem is, if you’re a trader, or a risk manager, and you haven’t hedged appropriately and this time, it does turn out to be different, you’re going to be having a very difficult conversation with your boss,” he said.

“You’re almost forced to hedge for something that isn’t going to happen, just on the off-chance that it does happen.”

Meanwhile, the sale of First Republic Bank (NYSE:FRC)’s assets to JPMorgan Chase (NYSE:JPM) delivered a degree of stability to the shares of other regional lenders, such as PacWest and Citizens Financial (NYSE:CFG) eased only modestly, down 0.3-0.5%.

But markets are still anxious about what may be the next shoe to drop, even if the initial response has been positive.

JPMorgan shares rose 0.2% in Tuesday’s premarket, and chief executive Jamie Dimon told analysts: “This part of the crisis is over.”

In commodities, Brent crude futures were steady at $79.32 a barrel, having dropped below $80 on Monday, as concern deepened about the global economy. Copper rallied for a fourth day, having lost over 2% the previous week.

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