DJIA futures fell during Wednesday’s session and traded near 48.8K, after failing to hold above 49.3K on Tuesday. The S&P 500 and Nasdaq Composite were near flat ahead of the Federal Reserve decision and large technology earnings after the close.
March Durable Goods Orders rose 0.8% month on month versus 0.5% expected, after a 1.2% fall the month before. Nondefence capital goods orders excluding aircraft increased 3.3% month on month versus 0.6% expected.
Oil Prices Jump On Iran Blockade Reports
US WTI crude rose about 5% to above $105 a barrel, and Brent moved above $117. The moves followed reports that the White House told officials to prepare for an extended US blockade of Iranian ports.
The April FOMC decision is due at 18:00 GMT, with a press conference at 18:30 GMT. Markets are priced for rates to stay at 3.75%, and Powell’s term as Fed Chair is due to end in May.
Kevin Warsh cleared the Senate Banking Committee and his nomination now goes to the full Senate. The Senate is in recess until after 4 May.
Alphabet, Amazon, Meta and Microsoft report after the bell. Seagate and NXP Semiconductors rose on Tuesday after issuing positive guidance.
Options Ideas For Volatility Rates Oil And Earnings
Given the market’s nervousness, we should anticipate a spike in volatility. The CBOE Volatility Index (VIX), often called the fear gauge, has already climbed to over 19 from the low teens just a few weeks ago. This makes buying call options on the VIX a direct hedge against a potential market downturn following the Fed’s announcement or a tech earnings miss.
The Fed is expected to hold rates at 3.75%, but the strong durable goods data and high oil prices will force Powell to sound tough on inflation. We’ve seen the odds of a summer rate hike, as priced by fed funds futures, increase from 15% to over 35% in the last month alone. Traders should consider options strategies that profit from rising bond yields, such as buying puts on Treasury futures.
Oil pushing past $105 for WTI is a significant inflationary threat, reminiscent of the price spikes we saw in early 2022 which preceded a major market downturn. With geopolitical tensions in the Strait of Hormuz showing no signs of easing, this upward trend in energy seems set to continue. Buying call options on oil futures or energy sector ETFs offers a way to directly profit from this dynamic.
With the Dow Jones slipping and the S&P 500 treading water, the risk to the downside for equities is clear. The combination of sticky inflation and a potentially more hawkish Fed Chair in Kevin Warsh creates a challenging backdrop for stocks. We believe purchasing put options on broad market indices like the SPY and QQQ is a prudent way to protect portfolios over the next few weeks.
Tonight’s earnings from the mega-cap tech companies will be pivotal, especially after concerns were raised by OpenAI’s recent performance metrics. We can expect significant price swings in names like Microsoft and Amazon, regardless of the direction. An options strategy like a long straddle, which involves buying both a call and a put, could be effective for traders who expect a large move but are uncertain of the direction.
