Treasury yields reached multi-year highs and stocks tumbled as a central bank review joined the Federal Reserve in boosting interest rates to curb scorching inflation at the expense of economic growth.
Ten-year US yields hovered near 3.7 percent, the highest since February 2011. The S&P 500 closed at its lowest since June, with some Wall Street voices predicting the gauge could soon test the June bottom of 2.5 percent below. from current levels. . FedEx Corp. jumped after saying it expects to save up to $2.7 billion as a result of cost-cutting steps.
The dollar remained near an all-time high, buoyed by the Fed’s hawkish policy and investors’ search for a safe haven. The Swiss franc fell as the central bank hike proved insufficient to meet expectations, while Japan bolstered its currency for the first time since 1998.
The Fed has given the clearest signal yet that it is willing to take on a recession as the necessary trade-off to regain control of inflation, with officials expecting another 1.25 percentage point tightening before the end of the year. Norway, Britain and South Africa also followed suit with increases of their own as officials scrambled to control rampant price increases.
“Our view is that the new price trajectory even higher versus longer is associated with a much higher probability of a hard landing and therefore is not only unequivocally hawkish but unequivocally bad for risk,” said Krishna Guha, Vice President of Evercore ISI.
The S&P 500 could be poised for a further decline after a rare technical index breakout, according to Berenberg strategists including Jonathan Stubbs.
It has been trading below its 200-day moving average for more than 100 sessions – a line that was previously only broken during the tech bubble and global financial crisis of the past 30 years. Either way, the gauge recorded most of its losses after crossing that level, with the index dropping another 50 percent in 2000-2003 and 40 percent in 2008-2009 before easing back.
Head of equities and quantitative strategist at Evercore Julian Emanuel lowered his year-end forecast for the S&P 500 index to 3,975 from 4,200 and expects a “full retest” of the June low in the coming weeks. The target cut represents a growing possibility of a recession after Federal Reserve Chairman Jerome Powell warned that a rate hike would not be “painless” for the labor and housing markets.
“The bad news is that we are still in one of the weakest seasonal windows of the year, especially in the middle of the year,” said Jonathan Krinsky, chief market technician at BTIG. The good news is that it reverses quickly by mid-October. We believe we test or break the June lows before then, which should constitute a better entry point for the year-end rally.”
Dennis DeBusschere at 22V Research expects markets to remain volatile while maintaining his neutral and range-bound stance on stocks.
“It’s hard to go long for signs of slowing underlying demand growth, but tail risks are limited by already tighter financial conditions, lower private equity, and higher implied volume,” he wrote.
According to Mark Heffel of UBS Global Wealth Management, the environment is not suitable for a strong directional placement on public indexes. However, he advises against relegating to the sidelines, “particularly given the constraints on liquidity from rising inflation and the challenge of timing to return to the markets without losing the recovery.”
“Instead, we remain invested but also selective, focusing our preferences on the themes of defense, income, value, diversification, and security,” he added.
Here are some of the major moves in the markets:
- The S&P 500 was down 0.8 percent as of 4 p.m. New York time
- The Nasdaq 100 index fell 1.2 percent
- The Dow Jones Industrial Average fell 0.4 percent
- The MSCI World Index fell 1 percent
- The Bloomberg Spot Dollar Index is unchanged
- The euro was little changed at $0.9839
- The British pound fell 0.1 percent to $1.1257
- The Japanese yen rose 1.2 percent to 142.35 per dollar
- The yield on the 10-year Treasury bond advanced 17 basis points to 3.70 percent
- Germany’s 10-year yield advances seven basis points to 1.96 percent
- UK 10-year bond yield advances 18 basis points to 3.50 per cent
- West Texas Intermediate crude rose 0.7 percent to $83.49 a barrel
- Gold futures rose 0.3 percent to $1,680.60 an ounce