(Bloomberg) – Stocks pared losses from near oversold levels, while bond yields soared on bets that the Federal Reserve will remain hawkish as it faces the highest inflation in around four decades.
After exhausting gyrations, the S&P 500 managed to close slightly above 3,900 – a threshold considered by some technical analysts to be a decisive level for near-term direction. Treasuries tumbled on the curve, taking the 30-year rate to the highest since 2014. The Bloomberg Dollar Spot Index hit a new all-time high, while the Japanese yen hit a new 24-year low.
“We continue to advise against major market direction calls,” said Solita Marcelli, chief investment officer for the Americas at UBS Global Wealth Management. “Investors should keep their asset allocations closer to their long-term strategic benchmarks. We also recommend gradually shifting portfolios towards higher quality and more defensive assets, which should better withstand several scenarios.
Hedge funds have increased exposure in consecutive weeks, data from Goldman Sachs Group Inc.’s prime brokerage show shows, increasing short selling through macro products such as index futures while buying shares of individual companies. The data suggests that fund managers are both eager for a bargain and wary of the general direction of the market.
US stocks gave up about half a rally from their June lows after a series of Fed speakers signaled the central bank would maintain its tight policy. While the stock market is still expected to remain in “choppy waters,” several indicators suggest the selloff is overdone, according to Keith Lerner of Truist Advisory Services.
“Markets don’t usually move in a straight line,” Lerner said. “Of course, oversold markets can be even more oversold. Yet, having advocated cutting stocks based on their strength, we would be less inclined to do so now – at least in the short term.
For Miller Tabak + Co.’s Matt Maley, any stock market gain at this point should be seen as short-term relief. He says traders should use these rallies as an opportunity to be more defensive.
Meanwhile, one of Wall Street’s biggest bears is getting even more pessimistic about the earnings outlook.
Morgan Stanley strategist Mike Wilson cut his earnings-per-share growth expectations, saying a slowing economy is now likely to be a bigger concern for stocks. In 2023, he expects earnings to fall 3%, even without an economic recession.
Investors are unwinding their equity positions as if a deep recession was already here. So say strategists at Deutsche Bank AG, who have found that a historically strong link between discretionary investors’ equity exposure and the ISM manufacturing index is dissolving.
Their current equity exposure is in the lower 10th percentile of historical observations after a sharp drop last week. Historically, this has been consistent with an ISM print of 47, below the 50 level that signals economic contraction.
Traders bracing for a jolt from the recession have recently accelerated their exit from equities, with global equity funds posting outflows of $9.4 billion in the week to August 31 – the fourth largest buyouts this year, according to EPFR Global data cited by Bank of America Corp.
Amid rising borrowing costs, US corporations launched a global wave of issuance, offering the most bonds in 12 months. The new urgency to increase debt is triggered by the potential for greater uncertainty – and higher cost – after this month’s meeting of the Federal Open Market Committee.
Data showing the U.S. services sector grew at the fastest pace in four months only bolstered traders’ bets on still-tight Fed policy.
In the final week before officials enter a blackout period ahead of the Sept. 20-21 policy meeting, Fed Chairman Jerome Powell leads a long list of central bankers offering their views . Their remarks will be carefully weighed to prove an inclination towards another 75 basis point rate hike, or whether it is possible to slow the pace of the hike.
“The Fed is going to do whatever it takes to get inflation under control,” said Gene Podkaminer, head of research at Franklin Templeton Investment Solutions. “If market participants don’t believe them, it’s probably at their peril.”
Read: Dollar Pain spreads beyond emerging economies to developed peers
What to watch this week:
- Apple event set to showcase new iPhones and Watches on Wednesday
- Bank of England Governor Andrew Bailey at the Treasury Committee on Wednesday
- Fed Regional Economic Activity Beige Book, Wednesday
- Cleveland Fed President Loretta Mester is scheduled to speak on Wednesday
- European Central Bank rate decision on Thursday
- Fed Chairman Jerome Powell is due to speak on Thursday
- Chicago Fed President Charles Evans and his Minneapolis counterpart Neel Kashkari are due to speak on Thursday
- Extraordinary meeting of EU energy ministers on the emergency response to electricity markets, Friday
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Some of the major movements in the markets:
- The S&P 500 fell 0.4% at 4 p.m. PT
- The Nasdaq 100 fell 0.7%
- The Dow Jones Industrial Average fell 0.5%
- The MSCI World index fell 0.5%
- The Bloomberg Dollar Spot Index rose 0.5%
- The euro fell 0.3% to $0.9903
- The pound was little changed at $1.1516
- The Japanese yen fell 1.6% to 142.82 per dollar
- The yield on 10-year Treasury bills rose 15 basis points to 3.34%
- Germany’s 10-year yield rose seven basis points to 1.64%
- The UK 10-year yield rose 16 basis points to 3.10%
- West Texas Intermediate crude fell 0.2% to $86.67 a barrel
- Gold futures fell 0.7% to $1,711.10 an ounce
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