Equity Index Futures Turn Negative After ECB Rate Decision

Equity index futures turned negative after the European Central Bank (ECB) provided a detailed but complex plan for addressing higher inflation and a weaker economy.

https://tickertapecdn.tdameritrade.com/assets/images/pages/md/
5 min read
Photo by Getty Images

Key Takeaways

  • Equity Index Futures Trim Premarket Gains After ECB Interest Rate Decision 

  • A Barrage Of Bad Headlines Pulled Stocks Lower On Wednesday 

  • London’s FTSE 100 Outperforms S&P 500 Thanks To The Strong Dollar

Shawn Cruz Director of Derivative Strategy, TD Ameritrade

(Thursday Market Open) Equity index futures were trading higher before the opening bell but dropped from premarket highs after the European Central Bank’s (ECB) announced their interest rate decision and hardened their outlook on inflation and the economy.  

Potential Market Movers

The ECB said that inflation pressures have “broadened and intensified” but doesn’t plan to raise their key rate by 25 basis points until July. For June, the ECB kept the refi rate at zero and the savings rate at -0.5%. The ECB also said it will stop purchasing new bonds but plans to replace the bonds currently on their balance sheet. ECB appears to be worried about doing too much too fast to curb inflation because it decreased its economic outlook and likely fears making the situation worse.

The Federal Reserve has been more aggressive than the ECB when it comes to inflation. It has already stopped its bond-buying program and is currently working to clear its balance sheet. Additionally, the Fed has increased its key rate twice to 1% as of May. This is why Friday’s Consumer Price Index (CPI) report is important for further insights it will provide to the U.S. inflation picture and future Fed rate hikes. Many analysts are hoping to see signs inflation has peaked.

Moving from the macro picture to the micro, discount retailer Five Below (FIVE) reported better-than-expected earnings despite delivering lower-than-expected revenues on weaker sales. FIVE also lowered its earnings outlook for the entire year. The stock was down more than 7.7% in premarket trading.

Despite cutting its earnings projections twice within a month’s time, Target (TGT) announced plans to boost its dividend by 20%. The move suggests that TGT sees its performance issues as short-term and aims to keep its long-term strategies in place.

Tesla (TSLA) rose 3.46% in premarket trading as UBS analysts upgraded the stock from neutral to buy with a price target of $1,100 per share. If TSLA were to hit that target, its shares would need to rise more than 50%.

Finally, Microsoft (MSFT) is creating a streaming gaming service allowing gamers to play XBOX games on Samsung television sets. The plan has been described as Netflix (NFLX) for gamers. The platform is expected to contain games from Activision Blizzard (ATVI), which Microsoft is in the process of acquiring. 

Reviewing the Market Minutes

The markets were pounded with a barrage of negative headlines that took the S&P 500 (SPX) down 1.08%, drove the Nasdaq Composite ($COMP) lower by 0.73% and trimmed the Dow Jones Industrial Average ($DJI) by 0.81%.

To start, Intel (INTC) was the latest company to warn that this quarter is weaker than expected due to the what’s happening across the global economy. The update caused INTC to fall 5.3% on the day. Intel was followed by Scott’s Miracle-Gro (SMG) slashing their fiscal-year earnings outlook as retail sales have been weaker than expected. SMG fell 8.8%.

The OECD (Organization for Economic Cooperation and Development) cut its global growth forecast to 3% from 4.5% yesterday. This is slightly higher than the World Bank’s projection of 2.9% released on Tuesday.

The Atlanta Fed’s GDPNow model that attempts to forecast the quarterly U.S. gross domestic product (GDP) is now estimating Q2 GDP at 0.9% instead of 1.3%. This is the second adjustment after an original Q2 growth forecast of 2.4%.

Just a day after Union Pacific (UNP) reduced their earnings guidance for their next fiscal year, the Dow Jones Transportation Average ($DJT) slid 3.81%. Rising oil prices appeared to hit transports hard as WTI crude futures rose 2% and closed just shy of $122 per barrel. Oil prices are nearing their peak when Russia-Ukraine war panic was at its highest in March. The rise in oil prices lifted the energy sector to the positive side while all other sectors closed in the negative. 

CHART OF THE DAY: PLAYING FTSE. London’s FTSE 100 (UKX:FTSE—candlesticks) has outperformed the S&P 500 (SPX—pink) over the last year and its relative strength (green) is still uptrending against the S&P 500. Data Sources: ICE, S&P Dow Jones Indices. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results. 

Three Things to Watch

Does Britain Look Great? The FTSE 100 tracks 100 of the largest companies from various industry groups traded on the London Stock Exchange. It underperformed the S&P 500 (SPX) most of the last 12 months but pulled ahead in January. However, much can be explained by currency differences. When adjusted for changes in the U.S. dollar, the FTSE 100 has fallen more than 5% in the last year while the S&P 500 is down 2.6% over the same timeframe.

The United Kingdom has seen three quarters of weak growth in their gross domestic product with readings of 0.9%, 1.3%, and 0.8% respectively. So far this week, the U.K. has experienced some mixed economic reports from purchasing managers. The Construction PMI report arrived Wednesday at a lower level than expected and lower than the previous month. On Tuesday, the nation’s Composite PMI and Services PMI were both higher than estimates but lower than the previous month.

If the U.K. economy remains weak, the FTSE 100 may struggle to climb higher.

Exchange Rates: The difference between the FTSE 100 and the U.S. dollar adjusted FTSE 100 reflect the currency headwinds U.S.-based multinationals are facing. As I’ve mentioned before, a stronger dollar makes American goods and services more expensive overseas but makes foreign goods and services cheaper in the United States.

However, it’s a complex situation. A weak dollar also weakens the purchasing power of U.S. consumers, which leads to price inflation. So, the dollar needs to strengthen to curb inflation, but it’ll make business tough on global companies based at home.

Compared to What? The strength of a currency often depends on what it’s being compared to. The U.S. Dollar Index ($DXY) has risen against a basket of currencies that include the euro, Japanese yen, British pound, Canadian dollar, Swedish krona, and the Swiss franc. Many of the central banks behind these currencies have worked to inflate their value similarly to the Federal Reserve’s tactics before 2022. The Fed has talked more about reducing inflation than it has actually done to reduce inflation. However, with other central banks still inflating their currencies, the Fed has done enough to strengthen the dollar. 

One way to look at price inflation is to say that the goods being purchased are more valuable than the currency. This is one reason why gold bugs like precious metals. They’re items of tangible value. Gold futures are up nearly 10.5% from their bottom in March of 2021, demonstrating the favoritism some investors place in gold. However, the dollar index has also risen nearly 10.5% since March of 2021, so gold has kept pace with the rising dollar.

Notable Calendar Items

June 10: May Consumer Price Index (CPI) and preliminary University of Michigan Consumer Sentiment Index Results

June 14: Producer Price Index (PPI)

June 15: Retail sales, FOMC Interest Rate Decision

June 16: Building permits, Housing starts, Philadelphia Fed Manufacturing Index and earnings from Adobe (ADBE)

Good Trading,

Shawn Cruz

Helpful Educational Content and Programming

  • Check out our upcoming Webcasts or watch any of our hundreds of archived videos, covering everything from market commentary to portfolio planning basics to trading strategies for active investors. You can also deepen your investing know-how with our free online immersive courses. No matter your experience level, there’s something for everybody.

  • Looking to stay on top of the markets? Check out the TD Ameritrade Network, live programming which brings you market news and helps you hone your trading knowledge. And for the day’s hottest happenings, delivered right to your inbox, you can now subscribe to the daily Market Minute newsletter here.

    TD Ameritrade Network is brought to you by TD Ameritrade Media Productions Company. TD Ameritrade Media Productions Company and TD Ameritrade, Inc., are separate but affiliated subsidiaries of TD Ameritrade Holding Corporation. TD Ameritrade Holding Corporation is a wholly owned subsidiary of The Charles Schwab Corporation. TD Ameritrade Media Productions Company is not a financial advisor, registered investment advisor, broker-dealer, or futures commission merchant.

Print

Key Takeaways

  • Equity Index Futures Trim Premarket Gains After ECB Interest Rate Decision 

  • A Barrage Of Bad Headlines Pulled Stocks Lower On Wednesday 

  • London’s FTSE 100 Outperforms S&P 500 Thanks To The Strong Dollar

Related Videos

Call Us
800-454-9272

Content intended for educational/informational purposes only. Not investment advice, or a recommendation of any security, strategy, or account type.

Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade. Clients must consider all relevant risk factors, including their own personal financial situations, before trading.

TD Ameritrade and all third parties mentioned are separate and unaffiliated companies, and are not responsible for each other’s policies or services.  

Inclusion of specific security names in this commentary does not constitute a recommendation from TD Ameritrade to buy, sell, or hold.

adChoicesAdChoices

Market volatility, volume, and system availability may delay account access and trade executions.

Past performance of a security or strategy does not guarantee future results or success.

Options are not suitable for all investors as the special risks inherent to options trading may expose investors to potentially rapid and substantial losses. Options trading subject to TD Ameritrade review and approval. Please read Characteristics and Risks of Standardized Options before investing in options.

Supporting documentation for any claims, comparisons, statistics, or other technical data will be supplied upon request.

This is not an offer or solicitation in any jurisdiction where we are not authorized to do business or where such offer or solicitation would be contrary to the local laws and regulations of that jurisdiction, including, but not limited to persons residing in Australia, Canada, Hong Kong, Japan, Saudi Arabia, Singapore, UK, and the countries of the European Union.

TD Ameritrade, Inc., member FINRA/SIPC, a subsidiary of The Charles Schwab Corporation. TD Ameritrade is a trademark jointly owned by TD Ameritrade IP Company, Inc. and The Toronto-Dominion Bank. © 2022 Charles Schwab & Co. Inc. All rights reserved.

Scroll to Top