What’s driving markets?

The appetite for additional risky bets was waning as investors took time out to assess the strong summer surge that powered the stock market to three-month highs, and awaited the latest monetary policy update via the minutes of the latest Fed meeting.

Hopes that inflation may have peaked and that the Federal Reserve thus may be able to avoid delivering a hard economic landing has pushed the S&P 500 up 17.4% from its mid-June low, and left the benchmark challenging its 200-day moving average for the first time since April.

“The index traded above its 200-DMA twice this year, once in early February, then late March, but couldn’t hold on to the gains and rapidly sold off,” noted Ipek Ozkardeskaya, senior analyst at Swissquote Bank.

“We will see if the third time is a charm; earnings and the FOMC minutes will be decisive for the short-term direction,” she added.

The Federal Reserve is due to release the text from its late July rate-setting meeting at 2 p.m. Eastern and traders will be keen to see whether the discussion matches current market expectations for the pace of rate hikes.

Before that, investors received more clues as to the health of the U.S consumer. Following better-than-expected results on Tuesday from Walmart
WMT,
+5.11%
and Home Depot
HD,
+4.06%,
it was the turn of retailing peers Target
TGT,
+4.57%
and Lowe’s
LOW,
+2.92%
to deliver earnings. Target’s numbers disappointed, after higher markdowns led to lower margins, but Lowe’s figures were well-received.

In addition, retail sales data for July are due for release at 8.30 a.m. Eastern. Retail sales are expected to grow just 0.1% versus 1% growth in June, according to economists polled by Dow Jones Newswires and The Wall Street Journal.

Potentially contributing to the market’s caution on Wednesday are concerns that the rally may be looking overstretched on a short-term basis.

The S&P 500 future’s 14-day relative strength index, a closely-watched momentum gauge, was 78 in early morning action, according to CMC Markets. Technical analysts consider a figure above 70 to be in ‘overbought’ territory.

“With [the] market looking overbought and having rallied more than 15% from June lows, the recent move is, in our view, starting to look over done. The growth outlook is going to remain challenging to navigate,” said Greg Boutle, U.S. head of equity and derivatives strategy at BNP Paribas.

S&P 500 (SPX) valuations are also no longer compelling, Boutle noted. “SPX 2023 price/earnings multiple at 18x is right at the top end of the 30-year range for 1-year forward earnings (ex. bubble periods, late 90s and the post lockdown recovery). In the middle of a downgrade cycle this could make it challenging for the recent pace of recovery to persist.”

How are other assets faring

• Oil futures were a touch firmer, with U.S. WTI crude
  CL.1,
  -0.10%
  adding 0.1% to $86.60 a barrel, despite hopes an Iran nuclear deal may help the country increase exports.

• The 10-year Treasury yield
  TMUBMUSD10Y,
  2.889%
  rose 5.9 basis points to 2.871% as traders awaited the Fed minutes.

• The ICE Dollar index
  DXY,
  +0.19%
  inched up 0.1% to 106.63, and this pressured gold, off 0.1% to $1787 an ounce.

• Bitcoin
  BTCUSD,
  -0.81%
  fell 0.7% to $23780.

• Asia markets were broadly firmer after Wall Street moved to a fresh three-month high overnight. Japan’s Nikkei 225
  NIK,
  +1.23%
  added 1.3% and Hong Kong’s Hang Seng
  HSI,
  +0.46%
  climbed 0.5%. In Europe the mood was more mixed, reflecting the dip in U.S. futures on Wednesday, and the Stoxx 600
  SXXP,
  -0.46%
  fell 0.2%.