Stock Euphoria Deflated With Powell as ‘Wild Card’: Markets Wrap
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(Bloomberg) -- Stocks continued to give back some of this year’s gains, with traders waiting to see if Jerome Powell will dampen the bullish reaction to his recent remarks as the Federal Reserve keeps its firm grip on policy.
As equities came off overbought levels, Treasuries took a hit following the best start to a year for cross-asset returns since 1987. The Fed’s boss will have an opportunity in an interview Tuesday to remind Wall Street that bets on rate cuts in 2023 are probably misplaced at this stage.
“Fed Chair Powell remains a big wild card every time he speaks,” said Chris Senyek, chief investment strategist at Wolfe Research. “Investors will be looking to see if he ‘walks back’ his very dovish tone from last Wednesday, particularly with respect to financial conditions and the US ‘disinflationary process.’ We still believe that the Fed will be ‘higher for longer’.”
In just two days, the bond market has gone from doubting the Fed to falling perfectly in line with the central bank’s projection for a peak in rates north of 5% later this year — from the current level between 4.5% and 4.75%. Fed Bank of Atlanta President Raphael Bostic said January’s strong jobs report raises the possibility officials will need to lift rates to a higher peak than previously expected.
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JPMorgan Chase & Co. strategist Marko Kolanovic reiterated Monday that investors should fade last week’s Fed-induced rally, arguing the economy’s disinflationary process could just be “transitory.”
In late trading, Pinterest Inc. tumbled on sales that missed estimates. Take-Two Interactive Software Inc., the video-game publisher known for the franchise , cut its outlook for bookings in fiscal 2023 and gave a disappointing forecast for the current quarter. Activision Blizzard Inc. reported bookings that beat projections on the strength of a new release as well as several other big titles.
A rout in megacaps like Apple Inc., Amazon.com Inc. and Google’s parent Alphabet Inc., which reported results last week, also weighed on sentiment. The group’s reality check came after the Nasdaq 100 approached bull-market territory. Investors will continue to focus on earnings to figure out if the recent rally was a “bear trap” driven by “fear of missing out,” noted Chris Larkin at E*Trade from Morgan Stanley.
“The major averages have become overbought after their strong January rallies,” said Matt Maley, chief market strategist at Miller Tabak + Co. “We are not trying to say that any short-term pullback will be followed by another strong rally. In fact, we believe that a short-term pullback could — and probably will — turn into another leg lower in the bear market that began just over a year ago.”
The S&P 500 now accurately reflects signs of better-than-expected economic growth and a drop in bond yields, according to Goldman Sachs Group Inc. strategists led by David Kostin. At the same time, higher valuations, lackluster corporate earnings and elevated interest rates mean there’s little room for the rally to extend, they said, a view that was broadly echoed by their counterpart at Morgan Stanley, Michael Wilson.
To Solita Marcelli at UBS Global Wealth Management, the risk-reward trade-off for equities doesn’t look appealing. She continues to recommend that equity investors position defensively and be prepared for additional volatility ahead.
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“We remain bearish equities,” said Eric Johnston at Cantor Fitzgerald. “There has been a dramatic change in sentiment and positioning which has gotten much more bullish, making this a tailwind for our bearish view. And while this dramatic change has happened, the outlook for earnings, the Fed, and multiples is unchanged. All of the stock being bought now will just create that much more supply on the way down.”
The divergence between the Nasdaq 100 and 10-year Treasury yields is becoming extreme, which has been a negative signal for the index during the past 18 months, according to cross-asset sales trader Gurmit Kapoor. The tech-heavy benchmark has been particularly sensitive to the bond market, and has seen strong corrections during the past four occurrences when it decoupled from rates.
That doesn’t mean it’s all gloom and doom for tech stocks. The share of investors willing to increase exposure to the industry over the next six months rose to 41% in the latest MLIV Pulse survey from 32% in September.
Geopolitical concerns continued to simmer on the background, with the US preparing to impose a 200% tariff on Russian-made aluminum and US-listed Chinese shares tumbling as Washington’s move to shoot down an alleged surveillance balloon from the Asian nation.
Elsewhere, the yen fell on the back of a Nikkei report that the Japanese government approached Bank of Japan Deputy Governor Masayoshi Amamiya about succeeding Haruhiko Kuroda at the helm of the central bank. A selloff in emerging markets deepened, with currencies having their biggest two-day decline since March 2020.
- US trade, Tuesday
- Fed Chair Jerome Powell interviewed by David Rubinstein at the Economic Club of Washington, Tuesday
- President Joe Biden delivers the State of the Union address before Congress, Tuesday
- US wholesale inventories, Wednesday
- New York Fed President John Williams is interviewed at Wall Street Journal live event, Wednesday
- 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:
- The S&P 500 fell 0.6% as of 4 p.m. New York time
- The Nasdaq 100 fell 0.9%
- The Dow Jones Industrial Average fell 0.1%
- The MSCI World index fell 1.1%
- The Bloomberg Dollar Spot Index rose 0.6%
- The euro fell 0.6% to $1.0730
- The British pound fell 0.3% to $1.2024
- The Japanese yen fell 1.1% to 132.62 per dollar
- Bitcoin rose 0.5% to $23,008.57
- Ether rose 1.5% to $1,647.26
- The yield on 10-year Treasuries advanced 11 basis points to 3.63%
- Germany’s 10-year yield advanced 10 basis points to 2.30%
- Britain’s 10-year yield advanced 19 basis points to 3.24%
- West Texas Intermediate crude rose 1.4% to $74.41 a barrel
- Gold futures rose 0.3% to $1,881.90 an ounce
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