Stocks close lows ahead of Powell speech: Market recap

(Bloomberg) – Stocks pared most of their losses as traders didn’t want to make big bets ahead of Jerome Powell’s speech on Wednesday.

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Gains in energy and financial companies tempered a decline in big tech. Amazon.com Inc., which sells investment-grade debt securities, saw its shares tumble. Trading volume was lower than last month’s average. A gauge measuring the global yield curve inverted for the first time in at least two decades, signaling a recession.

Powell is expected to cement expectations that the Fed will slow its rate of hikes next month – while reminding Americans that its fight against inflation will continue through 2023. borrowing costs, with a key official saying he sees rates heading a bit higher than he had expected just a few months ago.

“The Fed has risen enough — and fast enough — to make a recession a base case scenario in our book,” said Lauren Goodwin, economist and portfolio strategist at New York Life Investments. “Volatility and risk premia will likely remain elevated as long as the Fed fights inflation in a growth slowdown.”

Goodwin also noted that stock earnings typically don’t start to decline until an economic recession begins. That means stock market fundamentals “could deteriorate further,” she added.

Inflated U.S. corporate margins are expected to begin to decline in 2023 as some spending begins to normalize, according to David Kostin of Goldman Sachs Group Inc. The company’s strategists, along with those at other banks including Morgan Stanley, said that they expected slower earnings growth next year.

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Alicia Levine of BNY Mellon Wealth Management says that even in a shallow recession, S&P 500 companies can still see earnings drop by 20%.

“There’s always a risk here at the end,” Levine told Bloomberg Television. “This is the year of transition. Next year it’s, ‘OK, now your rates are higher, what does that mean for the real economy?’ And I think we really didn’t take the price into account.

Read: Barclays delays US recession call, Fed cuts amid strong data

Read: BofA says US yield curve will return to normal on Fed pivot

Fed actions, stubborn inflation, the war in Ukraine and the outlook for corporate earnings “make this a tough story for the stock market to tell over the next 12 months,” said Kevin Philip, partner at Bel. Air Investment Advisors.

Institutional clients and hedge funds poured money into stocks last week, while retail clients sold off for a fifth straight week – selling is expected to continue into next month, strategists say. Bank of America Corp. directed by Jill Carey Hall.

The recent momentum in flows as well as the absence of “capitulation-type exits” indicate that investors believe the market has already bottomed out. But BofA strategists say they see additional downside risk ahead of a bottom in the first half of 2023.

Several widely followed DeMark indicators, which attempt to anticipate long-term momentum and trend reversals, suggest that the Cboe Volatility Index may be about to reverse.

History shows that the appearance of a “countdown 13” pattern has led to turns in the past, with a cluster of such signals occurring at the most recent lows. The so-called fear gauge last week fell to its lowest level since August as the S&P 500 rose.

Meanwhile, former greenback bulls including JPMorgan Asset Management and Morgan Stanley say the era of dollar strength is coming to an end, with cooling prices prompting markets to cut bets on a new Fed tightening. This could create buying opportunities for the currencies of Europe, Japan and emerging markets.

Key events this week:

• EIA Crude Oil Inventory Report, Wednesday

• Chinese PMI, Wednesday

• Speech by Fed Chairman Jerome Powell on Wednesday

• The Fed releases its Beige Book on Wednesday

• U.S. wholesale inventories, GDP, Wednesday

• S&P Global PMIs, Thursday

• U.S. Construction Spending, Consumer Income, Initial Jobless Claims, ISM Manufacturing, Thursday

• BOJ’s Haruhiko Kuroda speaks on Thursday

• U.S. unemployment, nonfarm payrolls, Friday

• ECB’s Christine Lagarde speaks on Friday

Some of the major movements in the markets:

Shares

• The S&P 500 fell 0.2% at 4 p.m. PT

• The Nasdaq 100 fell 0.7%

• The Dow Jones Industrial Average is little changed

• The MSCI World index remained unchanged

Currencies

• The Bloomberg Dollar Spot Index fell 0.1%

• The euro fell 0.1% to $1.0326

• The British pound fell 0.1% to $1.1947

• The Japanese yen rose 0.1% to 138.79 per dollar

Cryptocurrencies

• Bitcoin rose 1.8% to $16,492.11

• Ether rose 4.3% to $1,222.22

Obligations

• The yield on 10-year Treasury bills rose seven basis points to 3.76%

• Germany’s 10-year yield fell seven basis points to 1.92%

• The UK 10-year yield fell three basis points to 3.10%

Goods

• West Texas Intermediate crude rose 1.7% to $78.54 a barrel

• Gold futures rose 0.4% to $1,762.60 an ounce

This story was produced with assistance from Bloomberg Automation.

–With help from Peyton Forte, Vildana Hajric and Garfield Reynolds.

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