Markets

Traders on Tenterhooks Sink Stocks in Fed Run-Up: Markets Wrap

September 21, 2022
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(Bloomberg) – Equities came under pressure as government bond yields hit multi-year highs and traders braced for a tightening Federal Reserve that is expected to hike interest rates to levels not seen since the 2008 financial crisis .

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A slide in stock prices pushed the S&P 500 more than 10% below its Aug. 16 high — which marked the culmination of the rally from the June low. About 93% of its companies were in the red on Tuesday, with all the majors in the red. Ford Motor Co. fell its hardest in 11 years after warnings of inflationary costs. US two-year yields approached 4% while a dollar reading rose to a record high.

Fed officials are about to quantify the “pain” they warned about when they release new economic forecasts on Wednesday. You could predict a significant rise in interest rates and unemployment as the estimated price of reducing inflation. Officials are expected to rise another 75 basis points – and some market watchers say a full point move could also be on the table.

For Charlie McElligott, cross-asset strategist at Nomura Securities International, the market is underestimating the possibility that the Fed could opt for a larger 100 basis point move. Alongside last week’s inflation surprise, he cited the fact that both jobs and wages have remained “hot” since Fed Chair Jerome Powell’s Jackson Hole speech in late August.

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Only two of the 96 analysts polled by Bloomberg are currently forecasting a full point increase this month.

“The idea that the Fed will hike rates and immediately cut them again in mid-2023 should now be set aside by the beach chairs again,” said Gargi Chaudhuri, head of iShares investment strategy for the Americas at BlackRock Inc. “Recent data has confirmed the need the Fed’s tough stance. We believe we are entering a new regime of structurally higher volatility and slowing growth.”

Nouriel Roubini, who correctly predicted the financial crisis, sees a “long and ugly” recession in late 2022 that could last all of 2023 and a sharp correction in the S&P 500 % falling,” said the chairman of Roubini Macro Associates. A “really hard landing,” which he expects, could see it fall 40%.

For traders grappling with a tightening Fed and a looming recession, corporate earnings will be next to fall, a BlackRock co-chief investment officer said.

“What we’re increasingly worried about is earnings revisions and we haven’t had that before,” said Nigel Bolton of BlackRock Fundamental Equities, which includes active equity strategies. “The tone of management teams is already starting to change and we’re going to see quite significant reductions for 2023,” he said.

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Refusing to surrender to a punishing stock market prone to volatility, professional speculators are ramping up bullish and bearish positions at the fastest pace in five years. As the S&P 500 plummeted last week, hedge funds bought individual stocks and bet against the broader market with products like exchange-traded funds, data from Goldman Sachs Group Inc.’s Prime Brokerage Show shows.

The appetite for protection from an index-wide decline in the S&P 500 over the next three months has fallen along with the stock market, pushing the put-to-call ratio to a fresh yearly low, data compiled by Credit Suisse Group The Derivatives Strategists show the AG.

At the individual stock level, the opposite has happened, with a similar ratio jumping to a yearly high as company-specific announcements sparked outsized stock reactions.

Investors also kept their eyes on geopolitical developments on Tuesday, as news emerged that the Kremlin hastily moved to holding sham votes on annexing regions of Ukraine its armed forces still control.

Read: Fraser, Dimon Lead Bank CEOs Warn Congress on Economic Risks

Important events this week:

  • Federal Reserve decision followed by press conference with Chairman Jerome Powell, Wednesday

  • Big bank CEOs will testify in two hearings before the US Congress on Wednesday and Thursday

  • US Existing Home Sales, Wednesday

  • EIA crude oil inventory report, Wednesday

  • Bank of Japan monetary policy decision, Thursday

  • The Bank of England rate decision on Thursday

  • US Conference Board benchmark index, Initial Jobless Claims, Thursday

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Some of the key movements in the markets:

Stocks

  • The S&P 500 was down 1.1% as of 4 p.m. New York time

  • The Nasdaq 100 fell 0.9%

  • The Dow Jones Industrial Average fell 1%

  • The MSCI World Index fell 0.9%

currencies

  • The Bloomberg Dollar Spot Index rose 0.4%

  • The euro fell 0.5% to $0.9978

  • The British pound fell 0.4% to $1.1386

  • The Japanese yen fell 0.3% to 143.66 per dollar

Bind

  • The 10-year Treasury yield rose 7 basis points to 3.56%

  • The 10-year German government bond yield rose 12 basis points to 1.93%

  • The 10-year UK government bond yield rose 15 basis points to 3.29%

raw materials

  • West Texas Intermediate Crude fell 1.5% to $84.45 a barrel

  • Gold futures fell 0.3% to $1,673.80 an ounce

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