Traders on Tenterhooks Sink Stocks in Fed Run-Up: Markets Wrap
Track the global equity, currency & commodity markets here.
(Bloomberg) -- Stocks came 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.
A slide in equities pushed the S&P 500 more than 10% below its Aug. 16 high -- which marked the peak of rally from the June bottom. About 93% of its companies were down Tuesday, with all major groups in the red. Ford Motor Co. tumbled the most in 11 years after warning on inflation costs. Two-year US yields approached 4% while a dollar gauge rose to a record.
Fed officials are about to put numbers on the “pain” they’ve been warning of when they publish new economic projections Wednesday. They could show a substantial rise in rates and unemployment ahead as the estimated price tag for reducing inflation. Officials are expected to hike by 75 basis points again -- and a few market observers say a full-point move 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 increase 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%.
For traders grappling with a hawkish Fed and a looming recession, the next shoe to drop will be on corporate earnings, said a BlackRock co-chief investment officer.
“What we’re concerned about increasingly is earnings downgrades and we haven’t had that yet,” said Nigel Bolton of BlackRock Fundamental Equities, which comprises active stock strategies. “The tone of management teams is already starting to change and we’re going to see pretty substantial reductions for 2023,” he said.
Professional speculators are refusing to surrender to a punishing equity market prone to 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.
Investors also kept an eye on geopolitical developments Tuesday amid news the Kremlin was moving hastily to stage sham votes on annexing the regions of Ukraine its forces still control.
Read: Fraser, Dimon Lead Bank CEOs Warning Congress on Economic Risks
Key events this week:
- Federal Reserve decision, followed by a news conference with Chair Jerome Powell, Wednesday
- Big-bank CEOs testify before US Congress in a pair of hearings on Wednesday and Thursday
- US existing home sales, Wednesday
- EIA crude oil inventory report, 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
Will the Nasdaq 100 Stock Index hit 10,000 or 14,000 first? This week’s MLIV Pulse survey focuses on technology. 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 1.1% as of 4 p.m. New York time
- The Nasdaq 100 fell 0.9%
- The Dow Jones Industrial Average fell 1%
- The MSCI World index fell 0.9%
- The Bloomberg Dollar Spot Index rose 0.4%
- The euro fell 0.5% to $0.9978
- The British pound fell 0.4% to $1.1386
- The Japanese yen fell 0.3% to 143.66 per dollar
- The yield on 10-year Treasuries advanced seven basis points to 3.56%
- Germany’s 10-year yield advanced 12 basis points to 1.93%
- Britain’s 10-year yield advanced 15 basis points to 3.29%
- West Texas Intermediate crude fell 1.5% to $84.45 a barrel
- Gold futures fell 0.3% to $1,673.80 an ounce
More stories like this are available on bloomberg.com
©2022 Bloomberg L.P.