Need to Know: How the ‘big kahuna’ of central banks may bring reality crashing down on stocks

Pushed aside by investors who have been distracted by politics and trade bickering, central banks are back and demanding attention. And attention they are getting.

With the ink barely dry on that seemingly hawkish Federal Reserve statement, China’s central bank startled some by not following that U.S. rate increase. The Bank of Japan puts out its policy call on Friday — no surprises are expected, but you never know.

And from Latvia, the European Central Bank has just revealed its timetable to start paring back on its easy-money throttle. Ahead of that, the excitement was been building.

“We think the ECB is the big kahuna” among all those central banks, Michael Purves, chief global strategist at Weeden & Co. told clients in a note.

That leads us to our call of the day from Joel Kruger, currency strategist at LMAX Exchange, who says U.S. investors may soon find out that what ECB President Mario Draghi and co. are up to across the pond matters a lot to them.

“The global equities market hasn’t been as worried about the onset of policy normalizations over the past several months due to the pace of this process, which has been quite slow, disjointed and restrained,” he says in emailed comments.

“But we are now seeing a more deliberate move in the direction of policy normalization. The ECB’s announcement of the official end of QE on Thursday would further highlight this important reality and could start to weigh more heavily on risk assets,” says Kruger.

Here’s a bit more explanation from Helen Thomas, founder of macro-consulting group BlondeMoney. She says what the ECB has been doing — buying European government bonds and driving the euro lower with negative deposit rates — has forced capital out of that region and into U.S. bonds.

That move has acted as an extra dose of QE for the U.S. bond markets, which has driven investors to look for better-yielding investments in equities and corporate bonds.

“Therefore central banks taking away the punch bowl, particularly in Europe which turbocharged the process, is key for the future of all assets globally,” says Thomas.

Check out: The ECB, not the Fed, is the match that will spark bond market volatility

And see: Why is the ECB facing a ‘close call’ on when to start winding down QE?

The markets

Dow YMU8, +0.17% S&P 500 ESU8, +0.18%  and Nasdaq-100 NQU8, +0.24%  futures are holding steady ahead of the ECB. That is after the S&P SPX, -0.40% Nasdaq COMP, -0.11% COMP, -0.11% and Dow DJIA, -0.47% all ended near session lows in the wake of the Fed decision.

Asian ADOW, -1.00% stocks fell across the board, led by a 1.4% drop for Taiwan stocks Y9999, -1.43% European stocks SXXP, -0.10% are also sliding ahead of the ECB meeting. The dollar DXY, +0.20% DXY, +0.20% is broadly lower, gold GCQ8, +0.46% is flat, and crude oil CLQ8, +0.38% is also trading softer.

Check out the daily Market Snapshot column for more.

The economy

Today’s clutch of top-tier data covers weekly jobless claims, retail sales and import prices for May, and business inventories for April. See the Economic Calendar.

Ahead of that, the ECB has left interest rates unchanged as expected, and said it plans to bring its bond-buying plan to close in December. A press conference with ECB President Mario Draghi starts at 8:30 a.m. Eastern. Check out our preview here.

The chart

Casting more light on the Fed fallout is our chart of the day, from Mott Capital Management founder Michael Kramer, who sees trouble ahead for banks.

The Financial Select Sector SPDR ETF XLF, -0.36%  is looking “worse and worse,” owing to the “game of chicken” being played by markets and the Fed, says Kramer in a blog post.

“The current pattern I’m tracking is a descending triangle, which is a bearish pattern, and suggest the ETF will fall,” he says.

The Fed is raising rates on the front end of the curve, while the long end of the curve is driven by market forces, he explains.

“In a world of low inflation and low interest rates, foreign buyers of bonds will flock to the long end of the yield curve and buy our 10-year bonds, and that will keep the long end of the curve from rising,” says Kramer in emailed comments.

In turn, that will cause spreads between 10-year and two-year interest rates to flatten, according to Kramer. So it’s bad for banks because deposit rates will continue to rise, but the rates they charge to loan money won’t.

The buzz

The Trump administration may be ready to slap tens of billions of dollars in tariffs against China as soon as Friday, and a similar retaliation is a big possibility.

Michaels Companies MIK, +0.87%  shares are getting hit hard after same-store sales and its outlook missed forecasts.

Oracle ORCL, -0.37%  is getting dinged by a J.P. Morgan downgrade.

Elon Musk’s futuristic Boring Co. has won a bid to build a high-speed train link between downtown Chicago and O’Hare International, and that deal could be announced as soon as Thursday, reports say. And former Tesla TSLA, +0.59%  workers, laid off this week, are drawing some requests for resumes after they shunned bitterness to publicly praise the electric car maker.

Apple AAPL, -0.82%  is testing a new security feature that makes it harder for investigators to get data from its iPhones.

Netflix NFLX, +4.43% is teaming up with video game developer Telltale for an “interactive narrative series,” but says don’t expect it to stream gameplay.

U.K. aircraft-engine maker Rolls-Royce RR., +3.89% is shedding 4,600 jobs after problems with engines powering Boeing BA, -1.83%  787 Dreamliners.

Whole Foods CEO John Mackey says he’s not afraid to get the ax over his run-ins with new owner Amazon AMZN, +0.36% Meanwhile, Microsoft MSFT, -0.45%  is reportedly ready to take on Jeff Bezos’s baby with technology that would see the end of checkout lines and cashiers in stores. It’s been talking to Walmart WMT, -0.01%  about working together.

The quote

“It was between 1½ and two hours after we left LA, and all of a sudden the plane went through a violent turbulence and then completely upended and we were nose­diving.” — That was passenger Janelle Wilson, reliving a terrifying plunge on a Qantas QAN, -1.53%  flight on Sunday.

The vortex pulling down the Melbourne-bound flight over the Pacific Ocean was apparently caused by wake turbulence from another aircraft.

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White House press sec. Sara Sanders says she’s not going anywhere

It’s the first anniversary of London’s deadly Grenfell Tower fire

Couple falls off a cliff to their deaths after trying to take a selfie

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