Risk assets swept into defeat as ‘Fear Scale’ rises

The selling deepened in the riskiest corners of the market as the UK’s plan to lift the economy fueled fears about rising inflation that could lead to higher rates, adding to fears of a global recession.

There was a sea of ​​red across the stock trading desks, as the S&P 500 briefly breached its June closing low. Cartographers looking for signs of where the path might loosen identified the threshold as a potential area of ​​support. However, the lack of a complete surrender may be a sign that the withdrawal is not over yet. Large companies such as Goldman Sachs Group Inc. lowering its targets for stocks, warning that a dramatic upward shift in rate expectations will affect valuations.

With risk-off sentiment solidifying, Wall Street’s “fear gauge” surged toward a three-month high, with the Cboe volatility index rising to 30. Over the course of the year, the US stock index reached nearly all-time lows when the VIX was above that mark. , according to DataTrek Research.

The dollar’s rise to a new record has pushed global currencies aside. The euro fell to its weakest since 2002, while the pound reached its lowest level in 37 years – as former US Treasury Secretary Lawrence Summers said “naive” UK policies could create the conditions for the pound to fall back from parity with the dollar. 10-year Treasury yields fell after earlier exceeding 3.8 per cent.

“It looks like traders and investors are going to throw in the towel this week at what looks like a ‘sky is falling’ kind of event,” said Kenny Polkari, chief strategist at SlateStone Wealth. Then the mental state will change.

The new UK government headed by Liz Truss introduced the most comprehensive tax cut since 1972 at a time when the Bank of England was struggling to rein in inflation, which is five times its target. The drop in gold bonds means investors are now betting the central bank will increase its benchmark lending rate by a full point to 3.25 percent in November, the largest increase since 1989.

Amid growing fears of a hard economic downturn, commodities have been hit hard across the board. West Texas Intermediate fell below $80 a barrel for the first time since January and was set for a fourth week of decline. Gold – a safe haven asset – was not able to gain due to the stronger dollar.

The Chinese yuan extended its losses to a level closer to the weak end of the allowed trading range since the sudden devaluation in 2015. With the hawkish Federal Reserve set to keep the dollar at high levels, analysts say there is a lot that Beijing can do. Just. Raising its currency at a time of economic hardship.

David Rosenberg, founder of the research firm of the same name, said the dollar’s strength has been relentless and would also be a “meaningful drag” on corporate earnings — a major headwind for stocks.

KKR & Co anticipates potential problems ahead, including a mild recession next year, with the Fed focusing narrowly on increasing unemployment to tame inflation. Henry McPhee, chief investment officer of the company’s balance sheet, wrote that the labor shortage in the United States is so severe that the Fed’s tightening may not work.

“This is a much harsher outcome than falling corporate profits, as it will encourage the Fed to tighten further,” he noted.

Investors are flocking to cash and shying away from nearly every other asset class as they turn to the most pessimistic since the global financial crisis, according to Bank of America Corp. Investor sentiment is “without doubt” the worst since the 2008 crisis, with government bond losses the highest since 1920, strategists led by Michael Hartnett wrote in a note.

“It’s a realization that interest rates are going to keep going up here and that will put pressure on earnings,” said Chris Gaffney, head of global markets at TIAA. “Valuations are still a bit high although they are down, interest rates still have a lot to go up and what is the impact of that on the global economy – are we heading into a more severe recession than everyone expected? I think it’s a combination of all of that, it’s not good news. “.

extreme pessimism

Stocks are actually still far from clear bargains. At its lowest level in June, the S&P 500 index traded with a gain of 18 times, a multiple of more than the lowest valuations seen in all eleven previous bear cycles, according to data compiled by Bloomberg. In other words, if stocks rebound from here, this bear market bottom will be the most expensive since the 1950s.

Gloomy sentiment is often taken as a paradoxical indicator for the US stock market, under the belief that extreme pessimism may point to brighter times ahead. But history suggests that stock losses could accelerate further from here before the current bear market is over, according to Ned Davis Research.

The Crowd poll has been in deeply pessimistic territory since April 11, or 112 consecutive trading days representing the third longest streak of gloom since the data began in 1995. Over the next few months following those periods of extreme sentiment, stock gains have been fleeting, With negative average returns three and six months after the 100-day mark.

In another threat to stocks, various iterations of the so-called Federal Reserve model, which compares bond yields with dividend yields, show stocks to be the least attractive for corporate and Treasury bonds since 2009 and early 2010, respectively. This signal has the interest of investors, who can now know to look to other markets for similar or better returns.

“The next question is when and how far down earnings estimates for 2023 will be,” said Eileen Hazen, chief market strategist and portfolio manager at FL Putnam Investment Management. “Earnings estimates for next year are very high, not really down, and where that happens you will have more pain in the stock because in addition to the multiple that goes down through the payout mechanism, the earnings you apply multiple times will also go down.”

With slower growth and tighter financial conditions starting to catch up with companies, a wave of cutbacks will come for the US investment-grade corporate bond market.

That’s according to strategists at Barclays Plc, who say companies are facing margin pressure thanks to rising inventories, supply chain issues and a strong dollar. The company expects the average monthly volume of reductions to rise to $180 billion in bonds over the next half year. The current monthly average is close to $40 billion.

Some of the main movements in the markets:


  • The S&P 500 was down 2.1 percent as of 2:05 p.m. New York time
  • The Nasdaq 100 index fell by 2 percent
  • The Dow Jones Industrial Average fell 2 percent
  • The MSCI World Index fell 2.4 percent


  • The Bloomberg Spot Dollar Index rose 1.3 percent
  • The euro fell 1.5 percent to $0.9691
  • The British pound fell 3.4 percent to $1.0883
  • The Japanese yen fell 0.7 percent to 143.38 per dollar


  • Bitcoin fell 2.5 percent to $18,769.78
  • Ether fell 2.1 percent to $1,296.41


  • The yield on the 10-year Treasury fell by three basis points to 3.68 percent
  • German 10-year bond yield advances six basis points to 2.02 percent
  • The UK 10-year bond yield advanced 33 basis points to 3.83 per cent


  • West Texas Intermediate crude fell 5.9 percent to $78.60 a barrel
  • Gold futures fell 1.7 percent to $1,652.50 an ounce

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