Wall Street futures were on the rise Tuesday morning, ahead of this possible significant rate cut from the Fed. The CME FedWatch tool showed a 65% probability of a 50 bps cut and a 35% chance of a 25 bps cut at the end of the Fed's two-day policy meeting on Wednesday. Futures for the S&P 500, Nasdaq, and Dow Jones were up 0.3%, 0.5%, and 0.3%, respectively.

This level of uncertainty around a Fed decision hasn't been seen since 2008, barring the Covid-19 emergency cut in March 2020. Today's data releases—retail sales, industrial production, business inventories, and the house price index—could still sway the outcome. However, when markets fixate on a narrative, in this case, a 50-point cut, they tend to interpret data to fit their expectations. It would take exceptionally strong data to change the prevailing sentiment.

The real drama, though, lies in what follows the decision. A 50 bps cut might spook investors, suggesting the Fed knows something ominous. Conversely, a 25 bps cut could reassure markets, as routine is often comforting. The key question: will a rate cut propel equity markets further, or trigger profit-taking and a shift towards value stocks? The stakes are high, and opinions are divided.

Last week's market momentum waned on Monday, giving investors a chance to brace for Wednesday's potential upheaval. Wall Street ended mixed, with a 1% gap between the Nasdaq's 0.47% decline and the Dow Jones' 0.55% rise. Apple's nearly 3% drop weighed on tech stocks, amid rumors of immediate availability for iPhone 16s, hinting at weak demand for the latest model. European markets hovered around equilibrium yesterday. Investors rotated out of semiconductors, which had rebounded the previous week, and resumed selling automotive and luxury goods stocks. Over the past three months, value stocks in Europe have gained 4%, while growth stocks have lost 2.5%. This trend reflects the economic cycle and monetary policy. In the U.S., value stocks are up 7.5% over three months, compared to a 0.5% decline for growth stocks.

In the Asia-Pacific region, market activity resembled Swiss cheese, with numerous closures. Mainland China and South Korea were closed, joined by Taiwan today. Hong Kong was open Monday and Tuesday but will close tomorrow. Amid the patchy trading, Tokyo's Nikkei 225 fell 1%, as investors fretted over the Bank of Japan's upcoming decision. While no rate change is expected, the Governor might signal a second rate hike in October, following the disruptive July hike. Hong Kong's Hang Seng rebounded 1.3%, despite tightening U.S. tariffs on China and potential restrictions on advanced semiconductor machinery exports to China from Japan, the Netherlands, and South Korea. India edged up, and Australia gained 0.2%. European markets are in the green.

Economic highlights:

On the agenda today, we have the ZEW survey results in Europe, while in the US, the focus is on retail sales and industrial production, as well as business inventories and the NAHB housing market index. The full agenda is here. 

The dollar is worth EUR 0.8977 and GBP 0.7567. The ounce of gold remains firm at USD 2,581. Oil is up, with North Sea Brent at USD 72.91 a barrel and US light crude WTI at USD 69.37. The yield on 10-year US debt is at 3.60%. Bitcoin is trading just under USD 60,000.

In corporate news:

  • Microsoft shares increased by 1.8% pre-bell following the announcement of a $60 billion share repurchase program and a 10% hike in its quarterly dividend.
  • Intel surged 6.4% after revealing plans to make its foundry business an independent unit and expanding its partnership with Amazon's cloud division.
  • Ferguson Enterprises saw a 3.7% drop in pre-market trading after reporting fiscal Q4 results that missed analysts' expectations.
  • Meta Platforms  - EssilorLuxottica said Tuesday it would extend its partnership with Meta to further develop smart glasses.
  • Box - Cloud computing company seeks to raise funds to repay short-term convertible debt and has announced a private issue of five-year convertible bonds in the amount of $400 million.
  • MicroStrategy announced a capital increase and will issue $700 million in convertible bonds maturing in 2028.
  • Steel Dynamics reported lower-than-expected third-quarter earnings on Monday, against a backdrop of fluctuating steel prices.
  • Tupperware Brands is preparing to file for bankruptcy as early as this week, Bloomberg News reported on Monday.

Analyst recommendations:

  • Accenture Plc: Citigroup maintains its buy recommendation with a price target raised from USD 350 to USD 405.
  • Frontier Communications Parent, Inc.: JP Morgan downgrades to neutral from overweight with a target price raised from USD 35 to USD 38.50.
  • Lattice Semiconductor Corporation: Stifel upgrades to buy from hold with a target price of USD 55.
  • Rh: Baptista Research downgrades to underperform from buy with a target price raised from USD 292.10 to USD 294.50.
  • Biomarin Pharmaceutical Inc.: Bernstein maintains its outperform recommendation and reduces the target price from USD 116 to USD 90. 
  • Capri Holdings Limited: BNP Paribas Exane maintains its neutral recommendation with a price target reduced from USD 57 to USD 45.
  • Deckers Outdoor Corporation: Stifel maintains its hold recommendation with a price target raised from 147.83 to USD 887. 
  • Ge Vernova Inc.: RBC Capital maintains its outperform rating and raises the target price from USD 192 to USD 246.
  • Insulet Corporation: Piper Sandler & Co maintains its overweight recommendation and raises the target price from USD 230 to USD 285.
  • Oracle Corporation: Baptista Research maintains its hold recommendation with a price target raised from 139.60 to USD 173.30.
  • Auction Technology Group Plc: JP Morgan upgrades to overweight from neutral with a target price reduced from GBP 5.43 to GBP 5.30.
  • Compass Group Plc: RBC Capital downgrades to sector perform from outperform with a target price of GBX 2400.