US stocks reversed as torrid rally hits wall – BNN Bloomberg

A sobering tone gripped Wall Street after a rally that added US$7 trillion to the stock market as traders braced for hawkish rhetoric from Federal Reserve officials during the Jackson Hole retreat more late this week.

Stocks suffered their worst rout in two months, after a surge that led the S&P 500 to its best start to a third quarter since 1932. The Nasdaq 100 underperformed as 10-year Treasury yields rose above 3 %. The meme stock frenzy continued to unravel, with other speculative corners of the market like Bitcoin and non-profit tech companies also taking a hit. The Cboe Volatility Index, or VIX, soared. As the dollar appreciated, the euro fell to its lowest level in almost two decades.

The surge in U.S. stocks from June lows showed signs of fatigue at the end of the earnings season, with the threat of an economic recession still looming amid warnings from Fed officials that the fight against inflation is far from over. That stance will likely be reinforced by Jerome Powell on Friday at the prestigious event in the mountains of Grand Teton, Wyoming, which has been used by Fed chairs as a venue to make key policy announcements.

“He can try to send a clear message that even if they have a slower pace of rate hikes, it won’t signal a lower peak rate or that they will be quick to cut rates,” Ed wrote. Moya, Senior Market Analyst at Oanda. . “After this week, Wall Street shouldn’t be surprised if fed funds futures start to forecast rate hikes for next year. This could be the week many return from vacation and double down on their rally calls. of the bear market.

In fact, while the recent surge in stocks has sparked talk of a new bull run, history shows there could be more turbulence ahead. Looking back at the last six bear markets since the 1970s, four of them have seen an average of six or seven short-lived uptrends, according to Glenmede. The study also showed that the 17% rise from June lows was consistent with historic bear market rallies.

“The current bear market may have other downsides, warranting an underweight to risky assets,” wrote Jason Pride, the firm’s chief private wealth investment officer.

Investors are also becoming aware of the impending acceleration of the Fed’s balance sheet reduction. So-called quantitative tightening kicks into high gear next month and will add pressure on riskier assets that have benefited from abundant liquidity. Bank of America Corp. strategists said last week that the central bank’s balance sheet liquidation posed a risk to stock prices.

Meanwhile, hedge funds are rapidly positioning themselves for higher rates in a key corner of the derivatives market. The group collectively placed a large short sale on futures contracts referencing the official successor to the London Interbank Offered Rate, known as the Overnight Collateral Funding Rate. This bet should benefit if Powell does indeed rule out a dovish pivot this week.

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The debate for most investors has shifted from a focus on the chances of a recession to the Fed’s impact on markets, according to Lindsey Bell, chief money and markets strategist at Ally, who bets that volatility will likely increase as investors search for catalysts.

“With real rates still rising and the outlook for 2023 rate cuts in the bond market, equity valuations look extremely stretched, especially if, as we suspect, the policy-induced economic slowdown will be a headwind to estimates currently earnings optimism for 2023,” Lisa Shalett, chief investment officer at Morgan Stanley Wealth Management, said in a note. “Stocks are overbought. Sit down for now.

According to the latest MLIV Pulse survey, stocks and bonds are set to fall again even though inflation has likely peaked, as rate hikes wake up the big sell-off of 2022. Ahead of the Jackson Hole symposium, 68% of people Respondents see the most destabilizing era of pricing pressures in decades eroding corporate margins and driving stocks lower.

As investors wonder if the selloff will get any worse from here, RBC Capital Markets’ Lori Calvasina says “it seems premature to end the rebound just yet,” even with stocks forecast for ” a bit of instability” in the second half of 2022.

“Deeply depressed levels of investor sentiment, which continue to show signs of healing, have kept us out of the bear camp,” she added.

Elsewhere, gold fell for a sixth day as a stronger dollar and higher bond yields are bad for bullion as they earn no interest and are valued in US currency. Oil held on to US$90 at the end of a volatile session after Saudi Energy Minister Prince Abdulaziz bin Salman said “extreme” volatility and lack of liquidity meant the futures market is increasingly disconnected from fundamentals and that OPEC+ could be forced to cut production.

What to watch this week:

  • US new home sales, S&P Global PMI, Tuesday
  • Minneapolis Fed President Neel Kashkari speaks during a question-and-answer session on Tuesday
  • U.S. durable goods, MBA mortgage applications, pending home sales, Wednesday
  • US GDP, first jobless claims, Thursday
  • The Kansas City Fed is hosting its annual economic policy symposium in Jackson Hole, Wyoming on Thursday
  • ECB July Minutes, Thursday
  • Fed Chairman Powell speaks in Jackson Hole on Friday
  • US Personal Income, PCE Deflator, University of Michigan Consumer Sentiment, Friday

Some of the major movements in the markets:

Shares

  • The S&P 500 fell 2.1% at 4 p.m. PT
  • The Nasdaq 100 fell 2.7%
  • The Dow Jones Industrial Average fell 1.9%
  • The MSCI World index fell 1.8%

Currencies

  • The Bloomberg Dollar Spot Index rose 0.6%
  • The euro fell 0.9% to settle at US$0.9943
  • The British pound fell 0.5% to settle at US$1.1766
  • The Japanese yen fell 0.4% to 137.45 per dollar

Obligations

  • The yield on 10-year Treasury bills rose six basis points to 3.03%
  • Germany’s 10-year yield rose eight basis points to 1.31%
  • The UK 10-year yield rose 10 basis points to 2.51%

Goods

  • West Texas Intermediate crude fell 0.6% to US$90.23 a barrel
  • Gold futures fell 0.8% to US$1,748.40 an ounce


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