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U.S. stock futures dipped on Wednesday as a more cautious tone prevailed following a strong start to the fourth quarter.

How are stock index-futures trading
  • S&P 500 futures

    dipped 31 points, or 0.8%, to 3772

  • Dow Jones Industrial Average futures

    fell 242 points, or 0.8%, to 30123

  • Nasdaq 100 futures

    eased 90 points, or 0.8%, to 11550

On Tuesday, the Dow Jones Industrial Average

rose 825 points, or 2.8%, to 30316, the S&P 500

increased 113 points, or 3.06%, to 3791, and the Nasdaq Composite

gained 361 points, or 3.34%, to 11176. The Nasdaq Composite was up 5.7% from its 52-week closing low, but it remains down 28.6% for the year to date.

What’s driving markets

Wall Street was on course for a relatively mild pullback, as futures suffered some selling after a sturdy rally over the past two sessions.

The S&P 500 has just enjoyed its largest two day percentage gain since April 2020, and the best start to a quarter since 1938, according to Dow Jones Market data.

The bounce followed three quarters of declines, the worst such run since 2008, during which time the S&P 500 fell 24.8% to a near two-year trough as investors worried that the Federal Reserve’s rate hikes to crush inflation would harm the economy.

However, recent soft U.S data, covering job openings and manufacturing, have encouraged some traders to trim bets on aggressive Fed hiking.

A week ago markets were forecasting U.S. interest rates would peak at nearly 4.8% by April 2023, but that figure has come down to 4.5%.

Atlanta Fed President Raphael Bostic will speak at 4 p.m. Eastern.

Johanna Chua, chief Asia economist at Citi, said that though U.S growth remained in better shape than other countries and Fed officials continued to sound hawkish, the market risked being wrongfooted by any signs that interest rates could soon peak.

“Even as the overall fundamental setup has not changed… trimming of bearish risk/bearish rates/bullish USD positions has driven a sharp reversal,” Chua said.

This view that oversold conditions and overly bearish sentiment was a key contributor to the latest advance was endorsed by Tom Lee, head of research at Fundstrat, though he accepted that bulls may be chastened by the recent past.

“Given the generally poor win-ratio for rallies in 2022, investors are naturally viewing the gains over the past two days as just another ‘bear market rally’,” said Lee in a note to clients.

Still, a number of shifting factors suggest the positive run could continue according to Lee.

These included the dip in Fed fund futures; a 5% pullback in the dollar index

; and the Vix volatility index

moving back below 30 with Vix futures back in contango.

In addition: “the Nasdaq 100 was ‘100% bid’ Tuesday…since 1996, this has only happened 6 times, and 6 of 6 times the [Nasdaq 100] is higher 6M and 12M later with average gains of 27% and 34%,” said Lee.

U.S. economic updates set for release on Wednesday include the September ADP employment report at 8:15 a.m.; international trade balance data for August at 8:30 a.m.; the September S&P services PMI survey at 9:45 a.m.; and the September ISM services report at 10 a.m.

The ADP report sets up the market for heightened nervousness when the crucial nonfarm payrolls data is published at the end of the week.

“All eyes are on the employment data on Friday, which has priced in tremendous one day volatility in the options market,” said Stephen Innes, managing partner at SPI Asset Management.

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