(Bloomberg) — Stock traders balked at any rebound attempt on Wednesday, with Treasury yields creeping back to multiyear highs and mounting concern that a hawkish Federal Reserve will raise the odds of a hard landing.
(Bloomberg) — Stock traders balked at any rebound attempt on Wednesday, with Treasury yields creeping back to multiyear highs and mounting concern that a hawkish Federal Reserve will raise the odds of a hard landing.
The day that marked the 35th anniversary of the equity crash saw the market halting a back-to-back rally, making any calls for a bottom look elusive. Not even bright earnings spots like Netflix Inc. and United Airlines Holdings Inc. were able to enthuse investors about more gains in the S&P 500. A late day rout in Tesla Inc. on disappointing sales could further weigh on sentiment.
“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.”
To Nicholas Colas at DataTrek Research, a more sustainable advance would require a backdrop of stabilizing yields — which was the setup for the two-month surge in the US equity benchmark that started in mid-June. That seems like a “tall order” given that Fed policy remains tight and bond rates are stuck at such high levels, he noted.
Treasuries saw a renewed wave of selling, spurred by firmer global inflation readings, corporate deal hedging flows and a poorly received US 20-year bond auction. The two-year yield jumped to the highest since 2007 as traders pushed expectations for the peak policy rate closer to 5% — from a current range between 3% and 3.25%.
Fed Bank of St. Louis President James Bullard said it’s good news that markets are pricing in anticipated hikes by policymakers, making it important that officials “follow through” and implement those increases to curb high inflation.
Read: Fed Says Economy Grew Modestly But Recession Worry Dims Outlook
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.
Read more: Bullard Says Fed Must ‘Follow Through’ on Anticipated Rate Hikes
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 0.7% as of 4 p.m. New York time
- The Nasdaq 100 fell 0.4%
- The Dow Jones Industrial Average fell 0.3%
- The MSCI World index fell 0.9%
Currencies
- The Bloomberg Dollar Spot Index rose 0.6%
- The euro fell 0.9% to $0.9773
- The British pound fell 0.9% to $1.1223
- The Japanese yen fell 0.4% to 149.87 per dollar
Cryptocurrencies
- Bitcoin fell 0.7% to $19,226.67
- Ether fell 1.4% to $1,296.2
Bonds
- The yield on 10-year Treasuries advanced 12 basis points to 4.13%
- 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 3.5% to $85.69 a barrel
- Gold futures fell 1.3% to $1,634.30 an ounce
–With assistance from Emily Graffeo and Peyton Forte.
More stories like this are available on bloomberg.com
©2022 Bloomberg L.P.
