Stocks Take Breather After Furious Rally From Low: Markets Wrap
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(Bloomberg) -- For many stock traders, it felt just about right that the market would take a breather after the dramatic rally of the past couple of days.
After a bounce that started around noon in New York and was attributed to a big options trade, the S&P 500 came back lower again. For a market plagued by fears about a recession and the Federal Reserve’s struggles to tame high inflation, the rebound from this year’s bottom has maybe gone too far, too fast.
Fundamentally speaking, nothing has changed that much to make the US central bank tilt toward a more moderate bias to prevent a hard landing. In fact, what Wall Street got on Wednesday was a renewal of the unflinching resolve from Fed officials to crush inflation.
Fed Bank of Atlanta President Raphael Bostic said he favors lifting rates to between 4% and 4.5% by the end of this year, and then keeping the tightening in place. He also echoed comments from his San Francisco counterpart Mary Daly, who downplayed speculation about rate cuts in 2023.
To Win Thin at Brown Brothers Harriman, the notion of any Fed pivot is just “wishful thinking” as Fed officials remain hawkish. He says another 75-basis-point hike next month is a “done deal.”
“Over the last few sessions, the market was too quick price in the ‘peak rate’ story in markets,” said Bipan Rai, head of North America currency strategy at CIBC. “Price pressures are set to remain sticky for some time and while the Fed might be closer to smaller incremental hikes than not, playing this via a ‘peak rate’ view is fairly dicey.”
Matt Maley at Miller Tabak, says the extreme positive breadth of the recent rebound in stocks is likely something that tells us the rally will take a “breather” for a day or two -- but it might not mean that the bounce is over.
“Yes, ‘bear-market rallies’ can see sharp advances that reverse almost immediately, so what we’ve seen over the last two days could be the ultimate head fake,” Maley added. “However, if the stock market can digest its gains of the last two days without a major reversal over the next few days, it’s likely that we’ll see a bit more upside follow-through to this week’s bounce before long.”
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If history is any guide, “markets will need to experience more stress” before a pivot in monetary policy and an equity bottom, Wells Fargo & Co. strategists led by Christopher Harvey wrote. The Cboe Volatility Index is still trading below 40 -- a threshold that in the past signaled a shift to monetary easing.
US stocks just posted a rare streak of quarterly declines and are in a bear market, but Citigroup Inc. quantitative strategists say they’re only just starting to reflect the risks of a recession.
A team led by Hong Li said equities could come under further pressure as they continue to be “heavily driven” by heightened bond market volatility as well as concerns around persistent inflation and hawkish Fed.
There’s “more downside risk for the market and the earnings season,” they wrote.
Retail investors, who helped push stocks to all-time highs, are now trying a different tactic: Betting against the market.
From January to August this year, even before the most recent slump in stocks, the number of newly opened short positions on trading platform eToro was 61% higher than in 2021 and 41% higher than in 2020. Meanwhile, some of the biggest US exchange-traded funds that bet against popular indexes are raking in record amounts of cash.
Investors’ uncertainty toward the health of US companies is rising -- and their leaders haven’t done much to help. The lack of an accurate road map for the crucial earnings season is setting the stage for a slew of potential surprises when the reporting season kicks off in coming weeks.
Aside from those few providing cold, hard numbers, executives at the 1,000 largest US firms have spent the past three months voicing a similar message in their public remarks: They’re unsure about what’s ahead. They’ve mentioned “uncertainty” or its synonyms when describing the outlook 484 times during that time, the highest tally since the quarter ending March 2021, data compiled by Bloomberg show.
BofA Strategist Says US Stock Rally Has Set Off a Bullish Signal
Key events this week:
- Eurozone retail sales, Thursday
- US initial jobless claims, Thursday
- Fed’s Charles Evans, Lisa Cook, Loretta Mester speak at events, Thursday
- US unemployment, wholesale inventories, nonfarm payrolls, Friday
- BOE Deputy Governor Dave Ramsden speaks at event, Friday
- Fed’s John Williams speaks at event, Friday
Will earnings disappoint and push equities to new lows? This week’s MLIV Pulse survey asks about corporate earnings. It’s brief and we don’t collect your name or any contact information. Please click here to share your views.
Some of the main moves in markets:
- The S&P 500 fell 0.2% as of 4 p.m. New York time
- The Nasdaq 100 was little changed
- The Dow Jones Industrial Average fell 0.1%
- The MSCI World index fell 0.1%
- The Bloomberg Dollar Spot Index rose 0.6%
- The euro fell 1% to $0.9884
- The British pound fell 1.3% to $1.1327
- The Japanese yen fell 0.3% to 144.56 per dollar
- Bitcoin fell 1% to $20,130.68
- Ether fell 0.8% to $1,350.92
- The yield on 10-year Treasuries advanced 11 basis points to 3.75%
- Germany’s 10-year yield advanced 16 basis points to 2.03%
- Britain’s 10-year yield advanced 16 basis points to 4.04%
- West Texas Intermediate crude rose 1.6% to $87.87 a barrel
- Gold futures fell 0.3% to $1,725.30 an ounce
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