Stocks were under pressure as Treasury yields hit multiyear highs, with traders bracing for a hawkish Federal Reserve that’s expected to boost rates to levels not seen since before the 2008 financial crisis.
(Bloomberg) — Stocks were under pressure as Treasury yields hit multiyear highs, with traders bracing for a hawkish Federal Reserve that’s expected to boost rates to levels not seen since before the 2008 financial crisis.
About 93% of the S&P 500 companies fell, with the gauge pushing toward its lowest since July. Ford Motor Co. tumbled as the automaker joined the chorus of major corporations warning about challenges rippling through the economy. Two-year US yields approached 4%, remaining on course for their biggest annual increase since 1994. The dollar rose to another record.
Fed officials are about to put numbers on the “pain” they’ve been warning of when they publish new projections for the economy, which could show a substantial rise in rates and unemployment ahead as the estimated price tag for reducing inflation. Officials are widely expected to boost rates by 75 basis points Wednesday — and a few market observers say a full-point hike might also be on the table.
To Charlie McElligott, cross-asset strategist at Nomura Securities International, the market is underpricing the possibility that the Fed could opt for a bigger move of 100 basis points. In addition to last week’s inflation surprise, he cited the fact that both the labor market and wages remained “hot” since Fed Chair Jerome Powell’s Jackson Hole speech at the end of August.
Only two of the 96 analysts surveyed by Bloomberg are currently predicting a full-point move this month.
“The idea that the Fed will raise rates and immediately cut again in mid-2023 should now be put back into storage alongside the beach chairs,” said Gargi Chaudhuri, head of iShares investment strategy for the Americas at BlackRock Inc. “Recent data have confirmed the necessity of the Fed’s tough stance. We believe we are entering a new regime of structurally higher volatility and slowing growth.”
Nouriel Roubini, who correctly predicted the financial crisis, sees a “long and ugly” recession occurring at the end of 2022 that could last all of 2023 and a sharp correction in the S&P 500. “Even in a plain vanilla recession, the S&P 500 can fall by 30%,” said the chairman of Roubini Macro Associates. In “a real hard landing,” which he expects, it could fall 40%.
Professional speculators are refusing to surrender to a punishing equity market prone to seemingly endless volatility — boosting bullish and bearish positions at the fastest rate in five years. As the S&P 500 plunged last week, hedge funds snapped up single stocks while betting against the broad market with products like exchange-traded funds, data from Goldman Sachs Group Inc.’s prime brokerage show.
The appetite for protection against an index-wide drop in the S&P 500 in the next three months has been falling together with the stock market, pushing the put-to-call ratio to a fresh one-year low, data compiled by Credit Suisse Group AG’s derivatives strategists show. The opposite has been happening on a single-stock level: A similar ratio jumped to a one-year high as company-specific announcements have been triggering outsized stock reactions.
The risk-off sentiment on Tuesday also dragged down cryptocurrencies, with Bitcoin sinking below $19,000.
Meantime, Nasdaq Inc. is making its first major push into crypto, as the second-largest stock exchange prepares to capitalize on increasing appetite for digital currencies among big-money investors.
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Key events this week:
- US existing home sales, Wednesday
- EIA crude oil inventory report, Wednesday
- Federal Reserve decision, followed by a news conference with Chair Jerome Powell, Wednesday
- Bank of Japan monetary policy decision, Thursday
- The Bank of England interest rate decision, Thursday
- US Conference Board leading index, initial jobless claims, Thursday
Some of the main moves in markets:
Stocks
- The S&P 500 fell 1% as of 11:05 a.m. New York time
- The Nasdaq 100 fell 0.6%
- The Dow Jones Industrial Average fell 1.1%
- The Stoxx Europe 600 fell 1.1%
- The MSCI World index fell 0.8%
Currencies
- The Bloomberg Dollar Spot Index rose 0.3%
- The euro fell 0.3% to $0.9990
- The British pound fell 0.2% to $1.1409
- The Japanese yen fell 0.4% to 143.72 per dollar
Bonds
- The yield on 10-year Treasuries advanced 10 basis points to 3.59%
- Germany’s 10-year yield advanced 14 basis points to 1.94%
- Britain’s 10-year yield advanced 16 basis points to 3.29%
Commodities
- West Texas Intermediate crude fell 1.8% to $84.15 a barrel
- Gold futures fell 0.3% to $1,673.80 an ounce
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