Stocks Get Hit as Hawkish Fed Chorus Grows Louder: Markets Wrap

(Bloomberg) -- A selloff in tech stocks weighed heavily on trading Wednesday, with the most-recent string of Federal Reserve speakers reinforcing the idea that interest rates will need to keep climbing to quash inflation.

Their tone was unmistakably intended to catch the market’s attention in what looked like a concerted effort to weigh against very risk-friendly interpretations of Jerome Powell’s interview on Tuesday, noted Krishna Guha at Evercore ISI. From Fed Bank of New York President John Williams to his Minneapolis counterpart Neel Kashkari and Governor Christopher Waller, the message was clear: policy may need to be tight for a while.

Those remarks just gave credence to the recent hot trade in the rate-options market — where several big wagers on the Fed’s benchmark reaching 6% have popped up. That’s nearly a percentage point higher than consensus. For several market observers, such hawkish positioning makes it tough for equities to keep grinding higher — especially after the rally that brought the S&P 500 to overbought territory.

Another aspect is that while Powell has refrained from pushing back on the stock surge that has contributed to a recent easing in financial conditions, other policymakers may indeed embrace tougher talk to put a lid on gains. That’s the perception of Lisa Shalett at Morgan Stanley Wealth Management, who says the recent rally in the face of worsening earnings and economic expectations has produced “massive disconnects” that threaten market stability.

“Even though we shifted early this year from ‘cautious’ to ‘cautiously constructive,’ adding back to stocks for the first time in 18 months, we continue to expect market volatility ahead as news flow on earnings, inflation, the economy, and Fed bounces from bullish to bearish and back again,” wrote Stephen Auth, chief investment officer of equities at Federated Hermes.

The S&P 500 fell over 1%, almost wiping out its previous session’s rally. The Nasdaq 100 underperformed, with Google’s parent Alphabet Inc. down more than 7% on concern that its new artificial intelligence chatbot Bard may yield inaccurate responses. Some other megacaps like Apple Inc. and Amazon.com Inc. also slumped, while Microsoft Corp.’s erased gains that briefly put the software giant’s market value above $2 trillion.

To Troy Gayeski at FS Investments, it will be a challenging environment for equities and fixed income for quite some time.

“When you think of equity markets, we think it’s going to be a choppy, sloppy mess as far as the eye can see,” he said. “It’s been a buoyant start to the year. And when you actually scratch your head, what’s actually causing it? The thing to remember is the most powerful rallies are always in bear markets because people underinvest and you have short covering that starts, and you start to suck people in to new bullish narratives.”

After the Closing Bell:

• Walt Disney Co. posted first-quarter profit that beat estimates, thanks to a strong performance from theme parks and smaller-than-expected losses in streaming.
  • Chief Executive Officer Bob Iger announced plans for a dramatic restructuring of the world’s largest entertainment company that includes cutting 7,000 jobs and $5.5 billion in cost savings.
• Mattel Inc. reported fourth-quarter results that missed Wall Street projections after the holiday season was slower than the company expected — missing guidance that the owner of Barbie and Hot Wheels brands had lowered in October.

Elsewhere, Turkey’s stock exchange suspended trading for the first time in 24 years following a selloff that erased billions of dollars from the value of its main equities gauge in the wake of two devastating earthquakes. Trading in Turkish equities, futures and option contracts will resume on Feb. 15. 

Key events:

• US initial jobless claims, Thursday
• ECB President Christine Lagarde participates in EU leaders summit, Thursday
• Bank of England Governor Andrew Bailey appears before Treasury Committee, Thursday
• US University of Michigan consumer sentiment, Friday
• Fed’s Christopher Waller and Patrick Harker speak, Friday

Some of the main moves in markets:

Stocks

• The S&P 500 fell 1.1% as of 4 p.m. New York time
• The Nasdaq 100 fell 1.8%
• The Dow Jones Industrial Average fell 0.6%
• The MSCI World index fell 0.5%

Currencies

• The Bloomberg Dollar Spot Index rose 0.1%
• The euro fell 0.1% to $1.0714
• The British pound rose 0.1% to $1.2066
• The Japanese yen fell 0.3% to 131.42 per dollar

Cryptocurrencies

• Bitcoin fell 1.6% to $22,827.99
• Ether fell 1.6% to $1,641.22

Bonds

• The yield on 10-year Treasuries declined five basis points to 3.62%
• Germany’s 10-year yield advanced one basis point to 2.36%
• Britain’s 10-year yield was little changed at 3.31%

Commodities

• West Texas Intermediate crude rose 1.7% to $78.43 a barrel
• Gold futures rose 0.2% to $1,887.70 an ounce

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