The stock market pared some of its losses, but remained lower on speculation the Federal Reserve will keep its monetary policy tight to tame inflationary pressures stemming from a still hot labor market.
(Bloomberg) — The stock market pared some of its losses, but remained lower on speculation the Federal Reserve will keep its monetary policy tight to tame inflationary pressures stemming from a still hot labor market.
As equities come off overbought levels, Treasuries are also taking a hit following the best start to a year for cross-asset returns since 1987. Geopolitical concerns still simmered 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.
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 “whether this bear-market rally is a bear trap being 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, so even the biggest bulls on the Street would admit that we could see a short-term pullback at any time,” 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 J. 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 tradeoff for equities does not look appealing. She continues to recommend that equity investors position defensively and be prepared for additional volatility ahead.
A slate of Fed speakers this week — including an eagerly awaited interview with Chair Jerome Powell Tuesday — will help shape the views on the outlook for rates. Fed funds futures show another 25 basis-point hike in March as nearly a done deal — while pegging a 75% chance of another one in May. The odds for a June hike have also risen to 28% from 8% last Monday.
That would take the terminal upper bound range of interest rates to 5.5% — higher than the rate implied by the 5.125% median in the central bank’s latest projections.
“Fed Chair Powell remains a big wild card every time he speaks,” said Chris Senyek 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’.”
Read: Bonds Tumble as Central Bankers Hammer Home Hawkish Message
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.
In corporate news, Dell Technologies Inc. is eliminating about 6,650 roles as it faces plummeting demand for personal computers, becoming the latest technology company to announce thousands of job cuts. Tyson Foods Inc., the biggest US meat company, said fiscal first-quarter earnings plunged 70% from a year ago and missed expectations.
A flurry of big deals in sectors ranging from mining to storage has provided respite for the world’s dealmakers after their slowest start to a year in two decades. More than $40 billion in potential transactions came to light over the weekend and into Monday, according to data compiled by Bloomberg.
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.
Key events:
- 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:
–With assistance from Vildana Hajric, Isabelle Lee and Michael Msika.
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