Minutes of the US Fed meeting reveal expectations of tightening policy, which will affect global equities

Following weaker-than-anticipated international statistics, investors watched American-Chinese trade tensions ratchet up as they awaited impending U.S. economic data and second-quarter profits on Wednesday.

Investors ignored the U.S. Federal Reserve meeting minutes that were made public on Wednesday, which indicated that the Fed voted unanimously to maintain interest rates constant in order to gain time before deciding whether more rate rises would be necessary. The majority of members, according to the minutes, anticipated future policy tightening.

The Fed minutes included no information to that effect, according to Michael James, managing director of stock trading at Wedbush Securities in Los Angeles. “If we continue to see a cooling of inflation, there may not be any further rate hikes,” James said. “After we get another significant data point on Friday with the jobs report and the inflation data the following week, we’ll have a much better sense,”

The earlier publication of a survey that showed China’s services sector, which had recovered since the lifting of COVID-19 lockdowns, expanding in June at the slowest rate in five months added to indications of a faltering recovery in the second-largest economy in the world.

A representative for the U.S. Commerce Department said on Wednesday that Washington “firmly” opposes the export restrictions on gallium and germanium imposed by China on Monday and that it would talk with its friends and allies. Following China’s unexpected move to ban exports of two metals commonly used in semiconductors and electric cars, businesses were scrambling to obtain supply before an August 1 deadline.

“If you look at the global level, all the things that came out (from China and Europe) show you that growth is still slowing, and you have the geopolitical backdrop between the U.S. and China that’s going to be a little bit of a headache,” said Jack Janasiewicz, lead portfolio strategist at Natixis Investment Managers Solutions.

After the Fed minutes, longer-dated U.S. Treasury rates hardly moved. After a weaker-than-expected data on American-made products, yields increased slightly and continued to rise steadily throughout the afternoon trade, with no response to the Fed minutes.

Following their return from the U.S. Independence Day vacation on Tuesday, investors exercised caution.

Investors will be watching future data, including inflation readings and the second quarter corporate earnings season, for hints on the Fed’s intentions for rates later this year, even though it is largely predicted that the Fed will raise rates again in July.

The S&P 500 dropped 4.83 points, or 0.11%, to 4,450.76, the Nasdaq Composite dropped 8.11 points, or 0.06%, to 13,808.66, and the Dow Jones Industrial Average dropped 106.59 points, or 0.31%, to 34,311.88.

The worldwide stock market index MSCI fell 0.40% and was on course to end a six-session winning run. The pan-European STOXX 600 index had finished down 0.73%.

Stocks in emerging markets fell by 0.80%. While Japan’s Nikkei fell 0.25%, MSCI’s largest index of Asia-Pacific equities outside of Japan ended 0.93% down.

According to CME Group’s FedWatch tool, traders are placing bets on an 88.7% likelihood that the Fed will increase rates by a quarter percentage point in July after halting last month, but have only factored in a 17.7% possibility for another rise in September.

Following the release of the Fed minutes, the U.S. dollar initially fell, but soon recovered to reach a session high.

The euro fell 0.23% to $1.0852 while the dollar index increased by 0.281%.

At 144.68 per dollar, the Japanese yen declined 0.16% against the dollar, while the final price for sterling was $1.2695, down 0.13% from the previous day.

Benchmark 10-year notes increased 8.7 basis points, from 3.858% late on Monday, to reach 3.945%. The 30-year bond’s yield recently increased 6.9 basis points from 3.877% to 3.9462%. The yield on the 2-year note yesterday increased by 1.3 basis points to 4.9529% from 4.94%.

Following the Fourth of July vacation, U.S. crude oil increased in value and the price differential with global benchmark Brent was reduced as a result of production reductions announced on Monday by major oil exporters Saudi Arabia and Russia.

Participants in the market were also anticipating demand information from the weekend, which often denotes the height of the travel season in the United States.

U.S. crude ended the day up 2.87% at $71.79 a barrel, while Brent ended the day up 0.52% at $76.65.