Stocks Sink on Fresh Covid Threat to World Economy: Markets Wrap

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Stephen Kirkland

28 Dec 2022, 10:12 PM IST

A public screen displaying the gross domestic price (GDP) figures in Shanghai, China, on Wednesday, Dec. 7, 2022. China eased a range of Covid restrictions Wednesday, including allowing some people to quarantine at home rather than in centralized camps and scrapping virus tests to enter most public venues — a sharp change in national strategy to quell public discontent and fire up the economy again. Photographer: Qilai Shen/Bloomberg

(Bloomberg) -- US stocks fell for a second day on concern that the end of China’s zero-Covid policy could lead to a rise in cases around the world.

The S&P 500 dropped to the lowest level since early November, albeit in thin holiday trading, with volume about 20% below the 30-day average. Tech shares remained under pressure, even as Tesla Inc. halted a seven-day rout prompted by concerns about ebbing demand. The 10-year Treasury yield pushed to 3.88% and a gauge of the dollar climbed to highs of the day late in the session.

Sentiment soured as concerns ramped up over the virus’s spread. Italian health authorities said they would begin testing all arrivals from China for Covid after almost half of the passengers on two flights to Milan were found to have the virus. If a new strain is found, officials may impose stricter curbs on travel from China, the Health Ministry said. Later, the US said it would require airline passengers from China to show negative Covid-19 tests.

The still-cautious mood is damping hopes for a rally in the last trading week of 2022 after a brutal year for financial markets. Global equities have lost a fifth of their value, the largest decline since 2008 on an annual basis, and an index of global bonds has slumped 16%. The dollar has surged 7% and the US 10-year yield has jumped to above 3.80% from just 1.5% at the end of 2021 as the Federal Reserve pursued an aggressive rate-hike path to rein in inflation.

Stocks Sink on Fresh Covid Threat to World Economy: Markets Wrap

“We think investors have become way too pessimistic given where we are in the rate hiking cycle,” wrote Nancy Tengler, CEO and chief investment officer at Laffer Tengler Investments. Following one of the fastest rate-hiking regimes in history, “we expect the economy to slow materially or enter recession at some point in 2023. To be sure a severe recession would be bearish for stocks, yet given the resilience of the U.S. economy and the tight labor market, we are expecting a slowdown or shallow and brief recession. That could allow stocks to rally in the second half of 2023.”

In a bid to revive Hong Kong as a finance hub, the city will end some of its last major Covid rules, scrapping gathering limits to vaccination checks and testing for travelers. Still, while the dismantling of Covid curbs may be a boost for the global economy, there’s concern about inflation pressures that could prompt the policy makers in the US to maintain tight monetary policy.

“Now that we’re almost a year into this bear market, at its low I think we were almost off 30%, we’ve seen enough to let us know that OK, we want to be on-guard for additional opportunities in that new year,” said Wells Fargo Investment Institute’s Sameer Samana on Bloomberg TV. On China reopening, “being as quickly as it’s happening probably complicates the Fed’s job with respect to putting a little bit of a bid under oil prices, putting a little bit of a bid under inflation globally, to aggregate demand. That’s going to be one of the biggest things that we’ll be watching in the first half.”

The Fed’s aggressive tightening policy is taking a toll on the housing market. Data Wednesday showed US pending home sales fell for a sixth month in November to the second-lowest on record. With borrowing costs roughly double where they were at the start of the year, home sales, and therefore prices, have been declining for months.

Elsewhere in markets, oil dipped amid thin liquidity as investors weighed the fallout from a Russian ban on exports to buyers that adhere to a price cap.

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