Stocks slumped as investor debate shifts toward how long the Federal Reserve will keep higher interest rates. US bonds were whipsawed as investors bought the dip.
(Bloomberg) — Stocks slumped as investor debate shifts toward how long the Federal Reserve will keep higher interest rates. US bonds were whipsawed as investors bought the dip.
The S&P 500 fell 0.4% while the Nasdaq 100 slid 0.2% after US retail sales rose more than forecast, data that suggested the economy can support higher rates and may dissuade policy makers from pivoting to easier policy.
Global bonds fell, though US Treasuries reversed course as buyers stepped in. Options traders have been recalibrating bets to accommodate the possibility that interest rates and inflation will stay high for longer. Yields on the 10-year pared an advance after reaching 4.23%, the highest since October while the two-year dipped after moving above 5%.
After a record first half in stock markets, investors are navigating a hawkish Federal Reserve, a China slowdown, and flare-ups across emerging markets. A devaluation in Argentina and Russia’s emergency rate hike on Tuesday to stem the ruble’s slide added to the risk-off sentiment.
Losses Multiply in Emerging Markets Craving Big Bang Stimulus
“The run-up we’ve had in markets is clearly large so as sentiment shifts around, it’d be no surprise to see some profit-taking,” said Mike Coop, EMEA chief investment officer at Morningstar Investment Management.
China’s emergence from pandemic lockdowns has been disappointing, fanning concern the world’s economic engine is sputtering. The nation is struggling to contain a potential default at developer Country Garden Holdings Co. after it missed payments on its debt.
The yuan traded at the weakest since November after policymakers lowered the rate on one-year loans — known as the medium-term lending facility — by 15 basis points to 2.5%.
Data for July underscored the economic slide, showing growth in consumer spending, industrial output and investment dropping across the board and unemployment picking up.
“China property worries and today China unexpectedly cutting two key rates are sending a clear signal that growth may not reach its GDP guidance of 5% by year-end,” said Stephane Ekolo, a strategist at TFS Derivatives. “Hence global growth is likely to suffer and the probability of a real slowdown or recession is growing.”
Still, Bank of America Corp.’s latest global survey of fund managers found investors the least pessimistic on stocks since February of last year, before the Fed began one of the most aggressive tightening cycles in decades.
They increasingly expect no recession at all within the next 18 months, and a “soft landing” in the next 12 months remains the base case, BofA strategists led by Michael Hartnett wrote in a note.
While participants predicted global growth will weaken over the next 12 months, expectations “improved significantly in August” and recession concerns are fading, according to the survey conducted from August 4 to August 10.
Elsewhere, oil fell and gold slumped as traders pared expectations for Fed rate cuts next year and beyond.
In currencies, the British pound was the best performer in the Group of 10 as investors weighed the prospect of an outsized interest-rate hike after wage growth accelerated to the strongest pace on record.
The focus later this week will be on UK inflation data due on Wednesday, followed by minutes from the Fed’s July policy meeting, as traders seek clues on central banks’ next moves.
Some of the main moves in markets:
Stocks
- The S&P 500 fell 0.3% as of 9:33 a.m. New York time
- The Nasdaq 100 fell 0.2%
- The Dow Jones Industrial Average fell 0.4%
- The Stoxx Europe 600 fell 0.7%
- The MSCI World index fell 0.3%
Currencies
- The Bloomberg Dollar Spot Index was little changed
- The euro rose 0.3% to $1.0938
- The British pound rose 0.3% to $1.2724
- The Japanese yen was little changed at 145.52 per dollar
Cryptocurrencies
- Bitcoin was little changed at $29,371.87
- Ether was little changed at $1,842.02
Bonds
- The yield on 10-year Treasuries advanced one basis point to 4.21%
- Germany’s 10-year yield advanced six basis points to 2.70%
- Britain’s 10-year yield advanced six basis points to 4.63%
Commodities
- West Texas Intermediate crude fell 1.2% to $81.54 a barrel
- Gold futures fell 0.4% to $1,936.90 an ounce
This story was produced with the assistance of Bloomberg Automation.
–With assistance from Cecile Gutscher, Sagarika Jaisinghani, Tassia Sipahutar and Michael Msika.
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