Volatility Grips Stocks As Treasury Yields Surge: Markets Wrap

(Bloomberg) -- Stocks saw another volatile session as bond yields hit multiyear highs after a slew of central banks joined the Federal Reserve in boosting rates to curb scorching levels of inflation at the expense of economic growth.

The S&P 500 trimmed most of a slide that topped 1% earlier in the day amid gains in defensive shares. Sentiment was still fragile, with some Wall Street voices predicting the gauge may test its June bottom that stands 3% below current levels. The Dow Jones Industrial Average outperformed. FedEx Corp. climbed after saying it expects to save up to $2.7 billion as a result of cost-cutting steps.

Ten-year US yields hovered near 3.7%, the highest since February 2011. The dollar remained close to its all-time high, fueled by hawkish policy and investors in search of haven. The Swiss franc slumped as a central bank hike proved not enough to satisfy expectations, while Japan propped up its currency for the first time since 1998.

The Fed gave its clearest signal yet that it’s willing to tolerate a recession as the necessary trade-off for regaining control of inflation, with officials forecasting a further 1.25 percentage points of tightening before year-end. Norway, Britain and South Africa also followed with hikes of their own as officials rush to get to grips with rampant price increases.

“I could see markets remaining volatile. but our expectation is that it’s going to be a risk-off sentiment until we start to see signs that this restrictive policy is actually doing what the Fed says it’s going to do,” said AJ Oden, senior investment strategist at BNY Mellon Investor Solutions.

Read: Fed Repo Facility Use Surges to Record High as Rates Rise

Read: Mortgage Investors Jump In After Fed Says MBS Sales Aren’t Near

The S&P 500 could be poised for more downside after breaking through a rare technical indicator, according to Berenberg strategists including Jonathan Stubbs. 

It has traded below its 200-day moving average for over 100 sessions -- a streak that was previously breached only during the tech bubble and the global financial crisis in the past 30 years. In both of those instances, the gauge posted most of its losses after surpassing that level, with the index declining by a further 50% in 2000-2003 and 40% in 2008-2009 before troughing, they said. 

Evercore’s chief equity and quantitative strategist Julian Emanuel cut his S&P 500 year-end projection to 3,975 from 4,200 and expects a “full retest” of the June low in the weeks ahead. The target cut accounts for a rising probability of a recession following Fed Chair Jerome Powell’s warning that the rate-hike process won’t be “painless” for the labor and housing markets.

“The bad news is we are still in one of the weakest seasonal windows of the year, especially in a mid-term year,” said Jonathan Krinsky, chief market technician at BTIG. “The good news is that it quickly reverses by mid-October. We think we test or break the June lows before then, which should set up a better entry point for a year-end rally.”

Dennis DeBusschere at 22V Research expects markets to remain volatile while maintaining his neutral, range-bound stance for stocks.

“It’s tough to get long until we get signs of slower underlying demand growth, but tail risk is limited by already tighter financial conditions, lower PEs, and higher implied vol,” he wrote.

The environment isn’t suitable for strong directional positioning on overall indexes, according to Mark Haefele at UBS Global Wealth Management. However, he advises against retreating to the sidelines, “especially given the drag on cash from high inflation and the challenge of timing a return to markets without missing out on rebounds.”

“Instead, we stay invested but also selective, and focus our preferences on the themes of defensives, income, value, diversification, and security,” he added.

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.

Here are some of the main moves in markets:

Stocks

• The S&P 500 fell 0.2% as of 3:15 p.m. New York time
• The Nasdaq 100 fell 0.5%
• The Dow Jones Industrial Average rose 0.2%
• The MSCI World index fell 0.6%

Currencies

• The Bloomberg Dollar Spot Index was little changed
• The euro was little changed at $0.9840
• The British pound was little changed at $1.1262
• The Japanese yen rose 1.1% to 142.42 per dollar

Bonds

• The yield on 10-year Treasuries advanced 16 basis points to 3.69%
• Germany’s 10-year yield advanced seven basis points to 1.96%
• Britain’s 10-year yield advanced 18 basis points to 3.50%

Commodities

• West Texas Intermediate crude rose 0.7% to $83.51 a barrel
• Gold futures rose 0.3% to $1,680.80 an ounce

More stories like this are available on bloomberg.com

©2022 Bloomberg L.P.