(Bloomberg) — Stocks rose in the last hour of New York trading, with big companies like Apple Inc. and Tesla Inc. Leading to a rebound that followed the market’s worst weekly defeat since mid-June.
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Major equity benchmarks had a hard time finding direction on Monday, as traders targeted another big rate hike in the US amid concerns over whether the Federal Reserve could further tighten and raise the odds of a hard landing. 10-year Treasury yields are hovering near 3.5% while the two-year interest rate, more sensitive to impending policy moves, hit its highest level since 2007.
Volatility is expected to remain elevated for at least the remainder of this year,” said Megan Hornman, chief investment officer at Verdence Capital Advisors. “Until there is a sustained improvement in inflation, the timing of peak Fed rate hikes is difficult. Although we do not rule out a test of the June S&P 500 low, we view it as a potential buying opportunity.”
Traders are betting that the Fed will raise 75 basis points on Wednesday, signal prices are heading above 4% and then pause. The roots of the long-wait strategy lie in the idea that the central bank would avoid the disastrous halt policy of the 1970s that allowed inflation to spiral out of control. While a case can be made for scaling, increasing the full shock can increase slack tension.
For Sam Stovall, chief investment strategist at CFRA Research, a full point rally would upset Wall Street as it would imply that the central bank is “overreacting to the data rather than sticking to its game plan”. He added that after the previous seven interest rate increases of this size, the US stock index fell four times each over a period of one, three and six months.
Ed Yardeni, head of his namesake research firm who hit market lows in 1982 and 2009, sees the Fed raising interest rates by 100 basis points this month, as President Jerome Powell and the central bank’s economic outlook appear hawkish.
He noted that this could cause the S&P 500 to retest its June 16 low of 3666.77, about 6% below current levels.
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While policy surprise can certainly move markets, the Fed’s revised projections of where monetary policy will eventually end and how long it is likely to remain at that level will be equally important. Swaps that projected rates over the next two years are now peaking at 4.5% in March 2023 – a full point higher than expected after the last meeting in July.
“The question to focus on is not whether the Fed will raise interest rates by 75 basis points or 100 basis points,” said Philip Nelson, head of asset allocation at NEPC. “What we are looking at is how aggressive Powell will be in the next six to twelve months. The messages we get in the next few weeks could be a bigger data point and a shock to investors.”
In a sign of how severe the stock crash was, the S&P 500 index has traded below a key technical level for the longest period since the global financial crisis.
Its long-term trend turned “sharply lower recently,” and the index closed below its 200-day moving average for 110 trading sessions, the longest streak since the 2008-2009 and 2000-2002 bear markets, according to the Bespoke Investment Group.
During the five-week period that began in mid-August and ended on September 7, long-term institutional investors sold only $51.2 billion worth of US-traded stocks — nearly a quarter of what they disposed of in the previous 31 weeks of this year, according to For S&P Global Market Intelligence analysis. The data does not include last week, when the surprise inflation reading sparked fears of a more aggressive Fed tightening than expected.
“Given the current negative indicators including high inflation and the upcoming Fed rate announcement, global economic growth concerns and earnings outlook, we expect to see a persistent negative pattern in the near term,” said Mark Hackett, head of investment research at Nationwide. “It wouldn’t take a lot of good news to start a fire in the market, but we don’t expect that good news to come in the next few weeks.”
Not every major bottom in the past 15 years peaked until the Cboe volatility index began trading 10 points higher volatility than VIX futures two months from now, indicating a forward month reversal of the volatility curve, according to data compiled by BTIG LLC.
This has not yet happened in this year’s defeat. Even as the VIX curve shifts upward and becomes flatter, it is still in its usual upward sloping form, which means the current cost of protection is less than several months.
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Bond issuers also appear to be cautious about the market now. Four potential high-grade borrowers considered selling the bonds on Monday, but ultimately chose to step down amid a volatile start to trading. Supply is now well below expectations for September, with yields rising rapidly derailing plans for some exporters.
In a harbinger of a time-tested economic slowdown, short-term US interest rates have outpaced yields on longer maturities by months. The MLIV Pulse survey, which attracted 737 responses, showed that most contributors expect a deeper reversal. Some see it reaching levels last seen in the early 1980s, when Paul Volcker raised borrowing costs to break the back of hyperinflation.
The majority of contributors to the MLIV poll say it’s best to bet on dollar gains, and 44% prefer selling the stock.
This week’s main events:
Housing starts in the US, Tuesday
Crude oil inventory report from the Energy Information Administration, Wednesday
US Existing Home Sales, Wednesday
The Federal Reserve’s decision, followed by a press conference with President Jerome Powell, Wednesday
Bank of Japan monetary policy decision, Thursday
Bank of England interest rate decision, Thursday
American Conference Board Leading Indicator, Initial Jobless Claims, Thursday
Some of the main movements in the markets:
The S&P 500 was up 0.7% as of 4 p.m. New York time
The Nasdaq 100 Index is up 0.8%.
The Dow Jones Industrial Average rose 0.6%
The MSCI World Index rose 0.4%
The Bloomberg Spot Dollar Index is unchanged
The euro was little changed at $1.0024
The British pound rose 0.1 percent to $1.1436
The Japanese yen fell 0.2 percent to 143.17 per dollar
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