Stocks trimmed losses from nearly oversold levels, while bond yields soared on the view that the Federal Reserve will stay hawkish as it confronts the hottest inflation in about 40 years.
(Bloomberg) — Stocks trimmed losses from nearly oversold levels, while bond yields soared on the view that the Federal Reserve will stay hawkish as it confronts the hottest inflation in about 40 years.
The S&P 500 came back above 3,900 after briefly breaching that threshold seen by some technical analysts as a make-or-break level for short-term direction.
Treasuries slid across the curve, taking the 10-year rate above 3.3%. The Bloomberg Dollar Spot Index rose to another record, and the Japanese yen hit a fresh 24-year low.
US shares have erased about half of a rally from their June lows after a raft of Fed speakers signaled the central bank will keep its policy tight.
Data showing the US service sector expanded at the fastest pace in four months just reinforced trader bets on a still aggressive Fed.
While the equity market should still remain in “choppy waters,” several indicators suggest the selling is getting overdone, according to Keith Lerner at Truist Advisory Services.
To Matt Maley at Miller Tabak + Co., any stock gain at this point should be seen as a short-term relief and an opportunity to get more defensive.
“We continue to advise against big market direction calls,” said Solita Marcelli, chief investment officer Americas at UBS Global Wealth Management.
“Investors should keep their asset allocations closer to their long-term strategic benchmarks. We also recommend incrementally tilting portfolios toward higher-quality and more defensive assets, which should hold up better across multiple scenarios.”
Meantime, one of Wall Street’s biggest bears is turning even more pessimistic on the outlook for profits.
Morgan Stanley strategist Mike Wilson cut his expectations for earnings-per-share growth, saying that a slowing economy is now likely to be a bigger concern for stocks.
In 2023, he expects profits to fall 3% — even in the absence of an economic recession.
Investors are unwinding their equity positions as if a deep recession is already here. So say strategists at Deutsche Bank AG, who found that a historically strong link between discretionary investors’ equity exposure and the ISM manufacturing index is unwinding.
Their current stock exposure stands at the bottom-10th percentile of historical observations after a sharp drop last week.
Historically, that’s been consistent with an ISM print of 47, below the level of 50 that signals an economic contraction.
Traders bracing for a recession jolt have recently accelerated their retreat from stocks, with global equity funds posting outflows of $9.4 billion in the week to Aug.
31 — the fourth-largest redemptions this year, according to EPFR Global data cited by Bank of America Corp.
Amid rising borrowing costs, US companies extended a worldwide wave of issuance — offering the largest amount of bonds in 12 months.
The newfound urgency to raise debt is sparked by the potential for greater uncertainty — and higher cost — after this month’s meeting of the Federal Open Market Committee.
Fed Chair Jerome Powell leads a hefty lineup of central bankers offering their views in the final week before officials enter a blackout period ahead of the Sept.
20-21 policy meeting. Their remarks will be weighed carefully for evidence of a tilt toward another 75 basis-point rate increase, or if there’s scope for the hiking pace to be dialed back.
“The Fed is going to do whatever it takes to get inflation under control,” said Gene Podkaminer, head of research at Franklin Templeton Investment Solutions.
“If market participants don’t believe them, it’s probably at their own peril.”
What to watch this week:
- Apple event due to feature new iPhones, watches, Wednesday
- Bank of England Governor Andrew Bailey at Treasury Committee, Wednesday
- Fed’s Beige Book of regional economic activity, Wednesday
- Cleveland Fed President Loretta Mester due to speak, Wednesday
- European Central Bank rate decision, Thursday
- Fed Chair Jerome Powell due to speak, Thursday
- Chicago Fed President Charles Evans and his Minneapolis counterpart Neel Kashkari due to speak, Thursday
- EU energy ministers extraordinary meeting on emergency intervention in electricity markets, Friday
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Some of the main moves in markets:
Stocks
- The S&P 500 fell 0.3% as of 2:56 p.m.
New York time
- The Nasdaq 100 fell 0.6%
- The Dow Jones Industrial Average fell 0.5%
- The MSCI World index fell 0.4%
Currencies
- The Bloomberg Dollar Spot Index rose 0.4%
- The euro fell 0.2% to $0.9911
- The British pound rose 0.1% to $1.1529
- The Japanese yen fell 1.6% to 142.87 per dollar
Bonds
- The yield on 10-year Treasuries advanced 15 basis points to 3.34%
- Germany’s 10-year yield advanced seven basis points to 1.64%
- Britain’s 10-year yield advanced 16 basis points to 3.10%
Commodities
- West Texas Intermediate crude was little changed
- Gold futures fell 0.6% to $1,712.10 an ounce
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