Stocks hit by Fed hike worries as bond yields jump: Markets roundup

(Bloomberg) — Stocks opened the week with losses and bond yields rose as a gauge of U.S. services rose unexpectedly, fueling speculation that the Federal Reserve will keep its policy tight to fight stubborn inflation.

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Stocks were also under pressure on the view that a recent rally would be overdone given the current set of economic risks. Nearly 95% of S&P 500 companies were in the red, with the benchmark down about 2%. Tesla Inc. weighed heavily on Monday after Bloomberg News reported that the electric vehicle giant plans to cut production at its Shanghai plant. The small-cap Russell 2000 underperformed.

The pullback in Treasuries pushed the 10-year yield near 3.6%. Swaps have shown a similar increase in expectations for where the Fed’s ultimate rate will be, with the market pointing to a peak near 5% in mid-2023. The current benchmark sits in a range between 3.75% and 4%. The dollar rose.

“Good economic news is bad news for stocks as they will maintain an elevated risk that interest rates may need to rise 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 he predicted and says investors are better off booking profits. He expects the S&P 500 to resume declines after the index broke above its 200-day moving average last week, saying “we are now sellers again.”

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Traders are also looking forward to the US producer prices report later this week, which will be one of the last data Fed officials will see before their December 13-14 meeting. Inflation data over the past month show that price pressures are slowly cooling but remain very high.

Even with the S&P 500 on course for its biggest fourth-quarter gain since 1999, recovery in equity markets is likely to be difficult.

An analysis of every bear market since 1960 suggests it could easily take more than two years for the index to recover from its previous peak, especially if a recession hampers the near-term outlook, Bloomberg Intelligence strategists Gina Martin Adams and Michael Casper said.

“Markets are likely to remain volatile and we do not believe the economic conditions are yet in place for a sustained upturn,” said Mark Hefele, 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.”

A majority of 291 respondents to the latest MLIV Pulse survey said leveraged loans will be the canary in the coal mine, indicating that corporate credit quality is deteriorating.

About 28 percent of those surveyed expect defaults to jump significantly if U.S. interest rates peak at or below 5 percent, which is about where the market is betting the Fed will stop hiking. Another 63% see a default if rates peak above 5%.

Key events this week:

  • US Trade Tuesday

  • EIA crude oil inventories report, Wednesday

  • Eurozone GDP, Wednesday

  • US MBA Mortgage Applications Wednesday

  • ECB President Christine Lagarde spoke on Thursday

  • US initial jobless claims Thursday

  • US PPI, wholesale stocks, University of Michigan consumer sentiment, Friday

Some of the major moves in the markets:

Stock up

  • The S&P 500 was down 2% as of 3:00 p.m. New York time

  • Nasdaq 100 down 2%

  • Dow Jones Industrial Average fell 1.5%

  • MSCI world index fell 1.3%

Currencies

  • The Bloomberg Dollar Spot index rose 0.8%

  • The euro fell 0.4% to $1.0494

  • The British pound fell 0.9% to $1.2175

  • The Japanese yen fell 1.7 percent to 136.65 per dollar

Cryptocurrencies

  • Bitcoin fell 1.1% to $16,925.24

  • Ether fell 1.9% to $1,252.94

Bonds

  • The 10-year Treasury yield rose 11 basis points to 3.60%

  • Germany’s 10-year bond yield rose two basis points to 1.88%

  • Britain’s 10-year bond yield fell five basis points to 3.10%

Goods

  • West Texas Intermediate crude fell 3.3% to $77.37 a barrel

  • Gold futures fell 1.6% to $1,780.70 an ounce

This story was created using Bloomberg Automation.

–With assistance from Vildana Hajric, Emily Graffeo, Isabelle Lee and Michael MacKenzie.

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