The Federal Reserve System of the United States is set to reveal its latest decision on interest rates, while investors eagerly await comments from the Head of the US Central Bank Jerome Powell. A struggle is underway between two leading activist investors, and pressure on mid-sized creditors remains. Here’s what you need to know about the financial markets on Wednesday, May 3.
1. Today, the Federal Reserve will announce its latest decision on interest rates, and many believe that the US central bank will raise the interest rate by another 25 basis points. If this happens, the Fed will increase borrowing costs from 0% to a minimum of 5% in about a year. The unprecedented scale and pace of these hikes highlight how desperately policymakers have tried to quell the rapid rise of inflation.
The consequences of tightening are already beginning to show. The US banking system is cracking, and recent data suggests that the labor market is cooling and the economy as a whole is slowing down. Nonetheless, price growth remains stubbornly high. Therefore, investors will be interested to know whether the Fed will pause its rate-raising campaign, and if so, for how long.
2. On Wednesday, the American futures market showed moderate growth but remained close to flat as investors await a decision from the Federal Reserve and any comments regarding the bank’s future plans. At 4:53 Eastern Time (8:53 GMT), the Dow futures rose by 39 points or 0.12%, while the S&P 500 futures traded 6 points or 0.15% higher and the Nasdaq 100 futures went up by 23 points or 0.18%.
All eyes are on Federal Reserve Chairman Jerome Powell, who is expected to make remarks on the future movement of interest rates and the condition of the financial system after the announcement of the interest rate later today. Comments on these matters will be the focus of his planned speech.
3. On Tuesday, the shares of billionaire Carl Icahn’s public fund lost almost a fifth of their value in a single day after becoming the latest target of short-seller Hindenburg Research. In its report, the company, headed by Nathan Anderson, claimed that Icahn Enterprises LP was overvaluing its assets and that the fund’s shares were trading at a large premium to their peers. Hindenburg alleges that IEP is increasing the value of its shares by effectively using the sales of newly issued shares to pay old investors “penny” dividends of around 16% – the highest among major U.S. firms, according to Reuters data. Meanwhile, Icahn receives his dividends in shares, not cash, according to Hindenburg.
Icahn, an activist investor whose famous Wall Street career has led to major changes at well-known brands, supported the fund’s public disclosure of information. He also lashed out at Hindenburg, stating that its allegations were a selfish ploy to increase its own short positions.
Such public animosity is not new for Hindenburg. Earlier this year, the New York-based group’s report reduced the value of Indian company Adani Group’s shares by $100 billion, and last month payment company Block was under its scrutiny.
4. On Tuesday, the shares of medium-sized American banks sharply fell, indicating that the rescue of First Republic Bank has not yet allayed concerns about the state of the banking sector.
The broad index of regional lenders fell to its lowest level since 2020, with the biggest losers in this decline being Western Alliance, which fell 15%, and PacWest Bancorp from Los Angeles, whose shares fell 28%. Both banks have lost more than $5 billion in market value this year, and their shares fell in pre-market trading on Wednesday as they are compared to recently failed banks such as Silicon Valley Bank and First Republic.
On Monday, JPMorgan bought most of First Republic’s operations after the San Francisco-based financial institution was subjected to regulatory seizure. At that time, JPMorgan CEO Jamie Dimon said that “this part of the crisis is over.”
However, investors are not fully convinced and continue to look for another weak link in the financial system.