(Bloomberg) — Stocks came under pressure as Treasury yields soared to multiyear highs on speculation the Federal Reserve will remain hawkish, raising the odds of a recession.
(Bloomberg) — Stocks came under pressure as Treasury yields soared to multiyear highs on speculation the Federal Reserve will remain hawkish, raising the odds of a recession.
The day that marked the 35th anniversary of the equity crash saw the market halting a back-to back advance and failing to sustain any rebound attempt.
To Nicholas Colas at DataTrek Research, a more durable rally at this stage would require a backdrop of stabilizing yields — which was the setup for the two-month surge in the S&P 500 that started in mid-June.
That seems like a “tall order,” however, given that Fed policy remains tight and bond rates are stuck at such high levels, he noted.
A renewed wave of selling propelled Treasury yields higher, with bearish sentiment spurred by firmer global inflation readings, corporate deal hedging flows and a poorly received US 20-year bond auction.
The two-year yield — which is more sensitive to imminent central bank moves — jumped to the highest since 2007 as traders pushed expectations for a peak policy rate closer to 5%.
Not even bright spots on the earnings front like Netflix Inc.
and United Airlines Holdings Inc. were able to enthuse traders about a continuation of this week’s broad-market rally. One of the reasons is that going into the current season, estimates had already been cut to the bone.
So beating forecasts wouldn’t be hard.
“Earnings are not allowing us to see that capitulation and resetting of 2023 earnings expectations yet,” Morgan Stanley’s Lisa Shalett told Bloomberg Television.
“It’s not yet a clearing event that sets up for a durable, viable bottom in this market.”
Corporate profits in the S&P 500 are expected to show growth of just 2% in the third quarter — which is way below the 10% increase predicted by analysts back in June, according to data compiled by Bloomberg Intelligence.
That means company guidance will — as it’s always been — crucial for market sentiment especially at a time of so many economic uncertainties weighing on stocks.
Fed Bank of Minneapolis President Neel Kashkari said that the US central bank could potentially pause its rate increases at some point next year if policymakers see clear evidence that core inflation is slowing.
However, he made it clear that he sees no evidence yet to give him “comfort” that core prices are moderating.
The Fed’s restrictive stance aimed at crushing stubborn inflation continues to take a toll on important areas of the world’s largest economy such as housing, with fresh data showing a drop in new US home construction and mortgage rates jumping to a two-decade high.
In another sign of economic jitters, a Bank of America Corp.
survey showed 60% of chief investment officers want companies to use cash reserves to improve their balance sheets — rather than opting for capital expenditures or stock buybacks.
The economy will probably mostly slow in 2023, so companies have time to use “still strong cash flow generation this year to shore up their balance sheets before a potential recession hits next year,” wrote credit strategist Yuri Seliger.
As the third-quarter earnings season gets underway, a nightmare scenario for stock pickers is unfolding.
The S&P 500’s three-month realized correlation — a gauge of how closely the top weighted stocks in the benchmark move relative to each other — is at its highest level since July 2020.
As correlations rise, it becomes increasingly difficult for fund managers to outperform the broader market.
For anyone attempting to catch a bottom in stocks, history shows that the last innings of bear markets typically inflict a lot of pain on stock investors.
That means more turbulence may lie ahead since the S&P 500’s drop over the past six months looks tame when compared with they type of declines typically seen in the last half-year of major equity downturns, according to Bespoke Investment Group.
“Oversold conditions coinciding with key support has recently underpinned a recovery in stocks, leaving many investors wondering if this will be another trick or a potential treat?” said Craig Johnson, chief market technician at Piper Sandler.
“From our technical perspective, risk for another trick appears high as there is insufficient evidence to confirm the equity market has fully capitulated. This does not eliminate the probability of a sizable relief rally developing into year-end.”
Key events this week:
- US existing home sales, initial jobless claims, Conference Board leading index, Thursday
- Euro area consumer confidence, Friday
Some of the main moves in markets:
Stocks
- The S&P 500 fell 1% as of 2:52 p.m.
New York time
- The Nasdaq 100 fell 0.7%
- The Dow Jones Industrial Average fell 0.7%
- The MSCI World index fell 1.1%
Currencies
- The Bloomberg Dollar Spot Index rose 0.7%
- The euro fell 0.9% to $0.9769
- The British pound fell 1% to $1.1207
- The Japanese yen fell 0.4% to 149.88 per dollar
Cryptocurrencies
- Bitcoin fell 0.9% to $19,190
- Ether fell 1.4% to $1,296.4
Bonds
- The yield on 10-year Treasuries advanced 12 basis points to 4.12%
- Germany’s 10-year yield advanced nine basis points to 2.38%
- Britain’s 10-year yield declined seven basis points to 3.88%
Commodities
- West Texas Intermediate crude rose 2.9% to $85.25 a barrel
- Gold futures fell 1.4% to $1,632.80 an ounce
–With assistance from Emily Graffeo and Peyton Forte.
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