Stocks gave up a technical bounce as 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 gave up a technical bounce as 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 headed toward its lowest since July 18, while the Nasdaq 100 underperformed. Treasuries slid across the curve, taking the 10-year yield above 3.3%. The Bloomberg Dollar Spot Index climbed to another record, and the Japanese yen sank to a fresh 24-year low.
US shares gave up about half of a rally from their June lows after a raft of Fed speakers signaled the central bank will keep policy tight. Data showing the US service sector expanded at the fastest pace in four months just reinforced market bets on more hikes.
“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.”
While several indicators suggest equity selling is getting overdone, economic uncertainties should still keep the equity market in ‘choppy waters’,” 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 rally 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. “To navigate this uncertainty, 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 a 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 recession.
Global equity funds had 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. US equities had the biggest exodus in 10 weeks, while $4.2 billion left global bond funds.
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. The 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.
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 0.7% as of 1:13 p.m. New York time
- The Nasdaq 100 fell 1%
- The Dow Jones Industrial Average fell 0.8%
- The MSCI World index fell 0.6%
Currencies
- The Bloomberg Dollar Spot Index rose 0.5%
- The euro fell 0.3% to $0.9903
- The British pound was little changed at $1.1523
- The Japanese yen fell 1.7% to 142.94 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 fell 0.1% to $86.76 a barrel
- Gold futures fell 0.7% to $1,711.40 an ounce
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