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Markets in consolidation mode ahead of Fed meeting and key earnings

Major US stock indices were almost unchanged yesterday, with the S&P 500 staging a second consecutive attempt to break above its current all-time high of 4,194, from 26 April, before ending almost unchanged at -0.02% (4,186). The Dow Jones was almost unchanged as well at 33,984. On the other hand, the small-cap Russell 2000 outperformed with a minor gain of +0.14% to 2,301.

At the end of the spectrum, the Nasdaq 100 underperformed with a loss of -0.47% to 13,906, dragged down by Tesla, the fourth largest capitalisation stock, which tumbled -4.53% to $704.74 post earnings, falling below a key technical level of $707.70. On a positive note, based on the performance in the 11 S&P sectors, cyclical and value stocks offered support, with outperformance in energy (+1.26%), financials (+0.91%) and industrials (+0.87%).

Looking ahead, market participants will be paying close attention to the Federal Reserve FOMC meeting later today at 7pm (UK time), followed by Fed chair Jerome Powell's press conference half-an-hour later. The consensus is no change on the current accommodative monetary policy, with the key Fed funds rate to be at close to zero percentage, with the central bank also maintaining its $120bn a month of bond purchases under its quantitative easing programme.

There will be no “dot plot” economic projections, so Powell's press conference is likely to come under heavy scrutiny on any hints or guidance on what type of data the Fed is watching before the start of its tapering process on its current quantitative easing programme, given that the economic data points from corporates, labour market and consumer sentiment have improved significantly since Q4 2020.

In most media polls, economists surveyed are expecting the Fed to start trimming its bond purchases in Q4 2021, with the first hike on the Fed funds rate to come in 2023. Anticipation of tapering guidance is likely to be signalled either in the July or September FOMC meetings, Powell’s semi-annual testimony to Congress, or at the Fed’s annual Jackson Hole economic symposium in late August during Powell’s keynote speech. The CME Fed funds future has currently priced in a 13.8% probability of a 25-basis-points rate hike to 0.25/0.50% in the Fed funds rate during the 15 December FOMC meeting, up from a probability of 8.1% as at 26 March.

On the earnings front, two US big tech firms report numbers after the close of the US session. Apple's Q2 FY2021 earnings per share (EPS) is expecting to come in at $0.99, an increase of +55% from the same quarter a year ago at $0.64. The consensus estimate for Facebook's Q1 2021 EPS is $2.35, an increase of +37% from the same quarter a year ago at $1.71.