Dow off nearly 300 points, gives up May gains, after ECB warns of asset bubbles and investors await Fed minutes

How are stock benchmarks performing?

• The Dow Jones Industrial Average DJIA, -0.80% fell about 272 points to reach 33,780, a decline of 0.8%, which wiped out the blue-chip index’s gains for May.
• The S&P 500 index SPX, -0.67% slumped 29 points, or 0.7%, to trade at 4,098.
• The Nasdaq Composite Index COMP, -0.56% retreated 68 points to about 13,234, a drop of 0.5%.

On Tuesday, the Dow fell by 267.13 points, or 0.8%, to close at 34,060.66, the S&P 500 finished with a loss of 35.46 points, or 0.9%, at 4,127.83, and the Nasdaq Composite slipped 75.41 points, or 0.6%, to finish at 13,303.64.

What’s driving the market?

Stocks were lower at midday as investors digested a new ECB report warning about potential “abrupt asset price corrections,” after the recent rally in financial assets and awaited an account of the Fed’s most recent policy meeting in April.

“You have a third central bank to come out and question valuations,” said Larry Adam, chief investment officer at Raymond James, pointing to recent comments by the Fed and ECB on potentially sharp asset price declines following significant rallies, as well as remarks from the Bank of China about “unreasonable” increases in commodity prices.

“When you start to combine that,” Adam said, investors have responded by saying: “Let’s focus on fundamentals,” particularly when it comes to high growth technology companies that have yet to turn a profit.

Investors also will look to minutes of the latest Fed meeting, even though they aren’t expected to provide substantial further insights into the central bank’s policy beyond statements in recent days from members of the rate-setting Federal Open Market Committee, which will be released at 2 p.m. Eastern Time.

Back in late April, the FOMC voted unanimously to maintain accommodative policies, aimed at holding down short-term borrowing costs between 0% and 0.25%, while maintaining its pace of monthly asset purchases. Fed Chairman Jerome Powell described the economic recovery from the COVID pandemic as uneven and incomplete.

But market participants have been struggling with the concept of “transitory” inflation pressures, as described by a number of Fed officials.

“In recent speeches, Fed officials have indicated that they view the rise in inflation as temporary, and that the downside surprise in payrolls was probably due to a temporary labor supply shortage, likely related to the pandemic and enhanced unemployment benefits,” wrote analysts at UniCredit.

“Our view remains that tapering will be discussed around August/September this year, with a formal announcement in December that tapering will commence in 1Q22,” the analysts wrote.

Some market participants and analysts fear that after years of not achieving the Fed’s 2% annual inflation target, one that the central bank has said it is now willing to overshoot to achieve, that a double-digit rise in inflation à la the 1960s may be brewing, Bloomberg News reported on Wednesday.

“I would rather see us go back to a Fed that is concerned about pre-empting inflation, rather than a Fed that is concerned about pre-empting fears that it will be concerned about inflation,” said former Treasury Secretary Larry Summers on Tuesday, in a discussion at an Atlanta Fed conference on financial markets.

On the public health front, India recorded a global record of 4,529 deaths from COVID-19 in a single day on Tuesday, according to its official numbers. The previous record was the 4,468 deaths counted in the U.S. in January. Brazil is third in cases with 15.7 million and second in deaths with 439,050. 

Which companies are in focus?

• Lowe’s Cos. LOW reported Wednesday fiscal first-quarter profit, sales and same-store sales that rose above expectations, and provided an upbeat outlook. Shares were off nearly 2%.
• Target TGT, +5.25% reported net income totaled $2.097 billion, or $4.17 per share, up from $284.0 million, or 56 cents per share, last year. Adjusted EPS of $3.69 was 525% higher than last year, reaching an all-time high. Its stock was up 5.2%.
• Southwest Airlines Co. LUV shares were down3% after it disclosed Wednesday that April operating revenue and load factor were in line with expectations, and said it continues to see improvement in leisure passenger demand and bookings for May and June travel. 
• Purple Innovation Inc. shares PRPL, -6.41% tumbled over 7% after the mattress and sleep products company priced a secondary offering of 7.3 million shares at $30 each, a discount over its closing price of $32.50 on Tuesday. 

How are other assets faring?

• The yield on the 10-year Treasury note TMUBMUSD10Y was flat at 1.64%. Yields and bond prices move in opposite directions.
• The ICE U.S. Dollar Index DXY, a measure of the U.S. currency against a basket of six major rivals, was up 0.2%, trying to climb off its lowest level since late February.
• West Texas Intermediate crude for June delivery CL.1, -3.36% CLM21, -3.36% fell $2.28, or 3.5%, to $63.23 a barrel on the New York Mercantile.
• June gold futures GCM21, +0.74% jumped $16.90, or 0.9%, to $1,884.90 an ounce, extending a climb for the most-active contract, which finished at its highest since Jan. 7 on Tuesday, FactSet data show.
• The Stoxx Europe 600 index SXXP, was trading 1.5% lower, while London’s FTSE 100 UKX fell 1.2%.
• In Asian trade, Japan’s Nikkei 225 NIK, -1.28%  lost 1.3% and the Shanghai Composite SHCOMP, -0.51%  edged down 0.5%.
• Bitcoin prices BTCUSD, -8.36% were down around $37,000 on Wednesday and market strategists said that the downturn in crypto may also reflect bullish sentiment for speculative assets waning.