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Updated: June 20, 2019

Dow set to open higher as potential Fed rate cut outweighs geopolitical concerns

By Anneken Tappe | CNN Business

Dow futures are pointing at a higher open on Thursday as the stock market is basking in the afterglow of a Federal Reserve meeting at which the central bank forecast two potential interest rate cuts for this year.

Geopolitical tensions that cropped up overnight don't seem to worry the market as of yet. A US drone was shot down by Iran in international airspace above the Strait of Hormuz, where two oil tankers were attacked last week.

Futures for the Dow and the S&P 500 are up 0.9%. Nasdaq Composite futures are doing even better, up 1.3%.

"Stocks' resilience in the face of growing US-Iranian geopolitical tension is a stark reminder not to fight the Fed. As the central bank's dovish messaging continues to drive interest rates lower, it's inoculating investors from other risks as the cost of capital and competition from bonds both fall," said Alec Young, Managing Director of Global Markets Research, FTSE Russell.

It will be interesting to see if this sentiment continues next week, Young added, when President Donald Trump and China's President Xi Jinping are set to meet to talk trade at the G20 summit in Japan.

At Wednesday's Fed meeting, Chairman Jerome Powell reiterated that the central bank would "act as appropriate" to sustain economic growth in the United States. Moreover, the Federal Open Market Committee now expects up to two possible interest rate cuts this year.

This was what the market wanted to hear and stocks finished higher.

While Powell stayed mum about whether the Fed's July meeting would bring the first rate cut, the market is now certain that it will happen. Expectations for a July cut rose to 100% yesterday, according to the CME's FedWatch tool.

Government bond yields, which express interest rate expectations, fell in response. The 10-year US Treasury yield dropped below 2% for the first time since November 2016. It now stands at 1.9975%, down 3 basis points.

Bond yields move opposite to prices, so when prices go up, yields go down.

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