The stock market failed to gain traction on speculation that a recent rally has probably gotten overdone as economic risks linger.
(Bloomberg) — The stock market failed to gain traction on speculation that a recent rally has probably gotten overdone as economic risks linger.
It’s not that investors were brimming with confidence at the start of trading, but the S&P 500 managed to climb almost 1% at one point. Those gains, which followed the best week for equities in a month, waned throughout the session — with a rise in Treasury yields bringing an additional layer of pressure.
To Michael Wilson at Morgan Stanley, while technical factors could give some support to equities in the near term, the “bear-market rally” wouldn’t last long as fundamentals continue to deteriorate. So basically the recent market action could be seen as the “calm before the storm,” said Mark Hackett, chief of investment research at Nationwide.
Four major events between now and the Federal Reserve’s March 22 decision will be the key catalysts in determining whether the 2023 revival in equities gets derailed or starts rolling again after a February slump.
“Traders are still anticipating a 25 basis-point hike in a few weeks, and investors should prepare for volatility if the jobs read surprises in either direction — especially as some Fed officials have indicated a 50 basis-point hike remains on the table,” said Chris Larkin, managing director at E*Trade from Morgan Stanley.
‘Max Hawkish’
Before the pivotal jobs report Friday, a double-day dose of Fed Chair Powell before Congress will set expectations for the next policy meeting.
Krishna Guha at Evercore said Powell will possibly emphasize the notable resilience of the economy and indications that the process of returning inflation to its target will be lengthy and bumpy. However, Powell will not turn “max hawkish” or fuel speculation of a 50 basis-point hike, Guha noted.
“This would not present any need to shift market rate pricing higher,” he added.
The US economy might escape a deep recession, according to JPMorgan Chase & Co.’s chief Jamie Dimon.
“We could still have a soft landing,” he said. “A mild recession is possible, a harder recession is possible. I think there’s a good chance that inflation will come down, but not enough by the fourth quarter — the Fed may actually have to do more.”
The stock and the credit markets are telegraphing a message of caution on how global financial assets and the economy may evolve. The spread between BBB rated dollar-denominated corporate debt and the earnings available on the S&P 500 is now above zero for the first time since the global financial crisis.
The differential is typically negative, reflecting the higher risk of capital that is invested in equities even as corporate bond yields stay elevated. However, when speculative money flocks into equities, it turns positive, suggesting that investors may be overlooking the risk embedded in stocks.
Read: Cash Will Be King in 2023 on Fed and Recession Fears: MLIV Pulse
Key events this week:
- US wholesale inventories, consumer credit, Tuesday
- Fed Powell’s semiannual Monetary Policy Report to the Senate Banking Committee, Tuesday
- Australia rate decision, Tuesday
- Euro area GDP, Wednesday
- US MBA mortgage applications, ADP employment change, trade balance, JOLTS job openings, Wednesday
- Fed Chair Powell’s semiannual Monetary Policy Report to the House Financial Services Committee, Wednesday
- Canada rate decision, Wednesday
- EIA crude oil inventories, Wednesday
- China CPI, PPI, Thursday
- US Challenger job cuts, initial jobless claims, household change in net worth, Thursday
- Bank of Japan policy rate decision, Friday
- US nonfarm payrolls, unemployment rate, monthly budget statement, Friday
Some of the main moves in markets:
Stocks
- The S&P 500 was little changed as of 4 p.m. New York time
- The Nasdaq 100 was little changed
- The Dow Jones Industrial Average rose 0.1%
- The MSCI World index rose 0.3%
Currencies
- The Bloomberg Dollar Spot Index was little changed
- The euro rose 0.4% to $1.0677
- The British pound fell 0.1% to $1.2019
- The Japanese yen was little changed at 135.99 per dollar
Cryptocurrencies
- Bitcoin fell 0.6% to $22,350.68
- Ether fell 0.7% to $1,560.95
Bonds
- The yield on 10-year Treasuries advanced three basis points to 3.98%
- Germany’s 10-year yield advanced three basis points to 2.75%
- Britain’s 10-year yield advanced two basis points to 3.87%
Commodities
- West Texas Intermediate crude rose 1.1% to $80.59 a barrel
- Gold futures fell 0.1% to $1,852.40 an ounce
This story was produced with the assistance of Bloomberg Automation.
–With assistance from Vildana Hajric, Isabelle Lee, Angel Adegbesan, Peyton Forte and Ven Ram.
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