This story was first published in the Before the Bell Newsletter of CNN Business. Subscribers, are you not? Sign up here. Clicking the same link will allow you to listen to the audio version of this newsletter.
The stock market has just had a week that was deemed positive, but will the Federal Reserve meeting in June dampen this rally?
Last week, the S&P 500 Index entered a bull-market. This means that it has risen 20% from its October low. The Nasdaq Composite experienced its longest weekly gain streak since November 2019. This was fueled by mega-cap technology stocks, which have been leading the market higher since 2023.
Investors appeared more relaxed than in recent years after the United States suspended its debt ceiling just in time to prevent a default. This allowed investors to breathe out a sigh. Last Thursday, the Cboe Volatility Index (VIX) closed at its lowest point since January 2020. CNN's Fear and Greed Index hit 'extreme Greed' on Thursday.
The next test for the stock market will be Fed's meeting in June 13-14. According to CME FedWatch Tool, the markets see an approximately 71% chance of a pause as of Friday afternoon.
On the same days as the Fed's meeting, the Consumer Price Index (CPI) and Producer Price Index (PPI), two important inflation reports, are due. Investors are less concerned with the impact of these readings on the Fed's decision to raise rates this time.
JJ Kinahan is the chief executive officer of IG North America. He said, 'Unless this number is wildly off from expectations, I do not think that the Fed will change their mind on anything'.
This is because Fed officials have said that they will likely skip a rate hike in June. This is different from a "pause" because it implies that the central banks could increase rates as early as July, after taking a short break in this month. As of Friday afternoon, futures traders saw a 53% likelihood of a hike in July, but also around a 31% probability of a pause.
Karim El-Nokali, Schroders' investment strategist, believes that the Fed's intentions are clear and the rate decision will not move the markets. He also says that some factors could still help to drive stocks higher in the coming week, including cool inflation figures or more dovish comments from Fed Chairman Jerome Powell during the press conference following the meeting.
The Fed's talk about further tightening the monetary policy could also dampen the rally of the markets.
El Nokali explained that if the market interpreted it as being particularly hawkish then it would be a good excuse for a little sell-off.
On June 16, the markets are due for what is known as a "quadruple witching," which occurs when futures, options, and index options expire at the same time.
Kinahan said that the end of the weekend could bring some volatility to the market.
Why are there no safe alternatives to Treasury bonds?
The United States avoided breaching its debt ceiling earlier this month, but the close brush with potential financial and economic catastrophe, along with the possibility that a credit rating downgrade, has brought back a perennial question.
According to the majority of investors, the short answer is no.
On June 3, President Joe Biden finally signed into law the bill that suspends the United States debt limit of $31.4 trillion through January 1, 2025. This puts to rest weeks of concern about the possibility that the country could default on its debt.
The United States may still see its credit rating downgraded, despite its continued ability to pay on time. Fitch Ratings warned this month it was keeping a close eye on the United States for a possible downgrade at the end of September.
The loss of Fitch's AAA rating is unlikely to impact Treasuries as the poster child for safe assets. Benjamin Jeffery is vice president of BMO Capital Markets' rates strategy and believes that Treasuries have become so indispensable as a safe asset, a downgrade in credit rating could even spark a rally.
Standard & Poors' downgraded America’s credit rating in 2011 - a move that may seem counterintuitive.
Investors are trained to seek out safety in times of market turmoil. Treasuries have a reputation as being one of the safest assets in the world, if they are not the riskiest. The United States almost defaulting on its debt hasn't changed that perception.
Patrick Klein, Portfolio Manager at Franklin Templeton Fixed Income, said that a credit rating change would cause more embarrassment for the US rather than impact on investors.
The US Treasury's pristine reputation is due to several factors, such as the fact that no other country boasts a currency exchange market as liquid, large, or highly rated.
In May, Josh Lipsky wrote that the US government is doing something the rest the world wishes they were doing. He was a former adviser to the International Monetary Fund and senior director at the GeoEconomics Center of the Atlantic Council.
Treasury Department data from June 8 shows that the US government owes approximately $31.9 trillion in total public debt.
The US government has never defaulted on its debt, despite coming close several times. The government is also seen as more stable than corporations, because it can tax and take other steps to make sure it doesn't go out of money. This makes it a great issuer of debt.
Treasuries are the safest asset. Gold is one of the safest assets, and its stability in price makes it a popular choice, even during volatile markets.
The price of precious metals is influenced by factors other than government debt, such as a controlled supply. This makes it too risky for the market to be used as a foundation of a financial system, in the same manner as the US Treasury Market, according to Olivier d'Assier. He is the head of APACApplied Research at Qontigo.
Treasuries, on the other hand, are denominated in US dollars, the leading reserve currency of the world. This position is unlikely to be replaced by any other form of exchange, such as gold, regardless its value.
George Mateyo is the chief investment officer of Key Private Bank.
Tuesday: Consumer Price Index for May and NFIB Small Business Optimism Index. Federal Reserve starts its two-day meetings.