Stocks Suffer Late-Day Swoon as Traders Shun Risk: Markets Wrap

(Bloomberg) — Stock traders took some risk off the table at the end of a week that resurfaced fears of a recession and hotter-than-expected inflation with a Federal Reserve decision around the corner.

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A late rout in equities shattered the calm that dominated most of the trading session, with the S&P 500 closing near Friday’s lows. The Dow Jones Industrial Average saw its worst weekly decline since September. 10-year Treasury yields climbed to about 3.6%.

Ahead of the Fed meeting, all eyes will be on Tuesday’s consumer inflation data – which is expected to show prices, albeit very high, continue to slow. Swaps signal to bettors they will raise the rate by 50 basis points on Wednesday after four hikes of 75 basis points. Officials including President Jerome Powell have signaled a reduction, while stressing that borrowing costs will need to remain contained for some time to curb inflation.

Don Rissmiller at Strategas said, “Bottom line: The Fed has already recognized the fact that they are risking the possibility of a recession in order to keep inflation longer.” “The work is not done. Rate hikes may slow to 50 bp, but we’re still looking at policy tightening (and staying tight) in 2023.”

According to Cliff Hodge at Cornerstone Wealth, financial conditions have weakened significantly since October’s consumer price reading, so the Fed will use the December meeting to push them back. The most accurate way to do this would be the Summary of Financial Proposals – specifically the bullet point name, he pointed out.

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“We think markets are very bullish on rates after the first quarter, and we expect Powell to take a more hawkish tone and point to higher rates for a longer period of time than what is currently priced in by futures markets. , ” Hodge said. “A so-called ‘hawkish’ supplement.”

Read: Markets Wake Up to Recession Risks in Weekly Threats

According to economists surveyed by Bloomberg, the Fed is set to keep rates at their peak throughout 2023, with expectations that markets have priced in a rate cut in the second half.

The Federal Open Market Committee’s median estimate for 2023 is expected to show 4.9% – up from 4.6% seen in September. It will provide a wonderful surprise to investors – who are now betting rates will be reduced by half a point in the second half of next year, although they also see rates rising to around 4.9%. The current rate is between 3.75% and 4%.

While many investors are impatient for the Fed to deliver its next rate hike, history shows they should be wary of doing so while inflation remains high, according to Bank of America Corp. strategists.

An analysis by Michael Hartnett showed that stocks have outperformed after the Fed stopped raising rates during periods of low inflation over the past 30 years. However, during the period of high inflation in the 1970s and 1980s, the balances fell after the last high, they wrote. In the current cycle, they expect the Fed to raise rates for the last time in March 2023.

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After analyzing 15 economic downturns dating back to 1929, strategists at Bloomberg Intelligence found a strong correlation between the length of a recession and the time it took the S&P 500 to recover its previous high.

In all cases, the scale is rounded to 386 days to reach the bottom and 573 days to reach the peak. But if the bottoming process was longer than average, the path back to the previous peak then lasted 1,997 days, six times the length of the upswings that followed a faster-than-average bottoming process.

Stocks may be on track for their worst returns since the global financial crisis, but the market faced its highest daily gain in nearly five decades, according to data compiled by Bloomberg through Wednesday. Those sales are calculated using a ratio called a strike ratio that measures the number of gains versus losses as a percentage of the total number of trading days.

That rate is 43%, the S&P 500’s lowest since 1974. An annual strike rate of less than 50% has been seen only 10 other times in the past 48 years, and recovery has been painfully slow in most cases.

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Still, some of the world’s top investors predict stocks will see low double-digit gains next year. Seventy-one percent of respondents to a Bloomberg News poll expect equities to rise, versus 19% who forecast a decline. For those seeing gains, the average response was a 10% return.

Some key movements in the markets:

Stocks

  • The S&P 500 was down 0.7% as of 4:00 p.m. New York time

  • The Nasdaq 100 fell 0.6%

  • The Dow Jones Industrial Average fell 0.9%

  • The MSCI World Index fell 0.2%.

Currencies

  • The Bloomberg Dollar Index rose 0.1%

  • The euro fell by 0.2 percent to 1.0530 dollars

  • The British pound increased by 0.2 percent and reached 1.2255 dollars

  • The Japanese yen was little changed at $136.71

Cryptocurrencies

  • Bitcoin fell 0.5 percent to $17,099.03

  • Ether fell 1.3% to $1,261.63

Bonds

  • The yield on 10-year Treasuries advanced 10 basis points to 3.58%

  • Germany’s 10-year yield advanced 11 basis points to 1.93%.

  • Britain’s 10-year yield rose nine basis points to 3.18%

Commodities

  • West Texas crude was little changed

  • The price of gold increased by 0.3 percent and reached 1807.30 dollars

This story was produced with the help of Bloomberg Automation.

— With the help of Elena Popina.

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