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U.S. stocks kicked off the week with losses and bond yields climbed as a U.S. services gauge rose unexpectedly, fueling speculation the Federal Reserve will keep its policy tight to fight stubborn inflation.
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Equities also came under pressure on the view that a recent rally would be overdone given the current set of economic risks. Over 95 per cent of the S&P 500 companies were in the red, with the gauge down more than 2 per cent. Tesla Inc. weighed heavily on Monday as Bloomberg News reported the electric-vehicle giant plans to lower production at its Shanghai factory. The Russell 2000 of small caps underperformed.
A pullback in Treasuries drove the 10-year rate near 3.6 per cent. Swaps showed a similar increase in expectations for where the Fed terminal rate will be, with the market indicating a peak of close to 5 per cent in the middle of 2023. The current benchmark sits in a range between 3.75 per cent and 4 per cent. The dollar climbed.
“Good economic news is bad news for stocks as it will keep the risk elevated that rates might have to end up higher later next year,” said Ed Moya, senior market analyst at Oanda.
Morgan Stanley’s Michael Wilson, one of the U.S. stock market’s most-vocal skeptics, has seen enough of the recent rally that he’d predicted and says investors are better off booking profits. He expects the S&P 500 to resume declines after the index crossed above its 200-day moving average last week, saying “we are now sellers again.”
Traders are also anxiously awaiting the U.S. producer price report later this week, which will be one of the final pieces of data Fed officials see before their Dec. 13-14 policy meeting. Inflation numbers over the past month have indicated that price pressures are slowly cooling, but remain very elevated.
Even with the S&P 500 on course for its biggest fourth-quarter gain since 1999, the recovery in equities markets is likely to be a slog.
An analysis of every bear market since 1960 suggests it could easily take over two years to recoup the index’s prior high, especially if recession plagues the near-term outlook, Bloomberg Intelligence strategists Gina Martin Adams and Michael Casper said.
“Markets are likely to remain volatile, and we do not think the economic conditions for a sustained upturn are yet in place,” said Mark Haefele, chief investment officer at UBS Global Wealth Management. “In our view, economic growth is likely to slow further next year as the cumulative impact of Fed rate hikes weighs on activity.”
Key events this week:
- U.S. trade, Tuesday
- EIA crude oil inventory report, Wednesday
- Euro zone GDP, Wednesday
- U.S. MBA mortgage applications, Wednesday
- ECB President Christine Lagarde speaks, Thursday
- U.S. initial jobless claims, Thursday
- U.S. PPI, wholesale inventories, University of Michigan consumer sentiment, Friday
Some of the main moves in markets:
Stocks
- The S&P 500 fell 2 per cent as of 2:31 p.m. New York time
- The Nasdaq 100 fell 2 per cent
- The Dow Jones Industrial Average fell 1.6 per cent
- The MSCI World index fell 1.4 per cent
Currencies
- The Bloomberg Dollar Spot Index rose 0.8 per cent
- The euro fell 0.5 per cent to US$1.0487
- The British pound fell 0.9 per cent to US$1.2167
- The Japanese yen fell 1.8 per cent to 136.71 per dollar
Cryptocurrencies
- Bitcoin fell 1.3 per cent to US$16,895.24
- Ether fell 2 per cent to US$1,251.18
Bonds
- The yield on 10-year Treasuries advanced 12 basis points to 3.60 per cent
- Germany’s 10-year yield advanced two basis points to 1.88 per cent
- Britain’s 10-year yield declined five basis points to 3.10 per cent
Commodities
- West Texas Intermediate crude fell 3.6 per cent to US$77.13 a barrel
- Gold futures fell 1.7 per cent to US$1,778.80 an ounce
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