Stocks finished off session lows as dip buyers swooped in, following a slide driven by worries about the financial system and the economy.

The S&P 500 trimmed most of decline that topped 1 per cent. Apple Inc. halted its longest losing streak this year. Eli Lilly & Co. led gains in health-care companies after sales of its weight-loss treatment blew past expectations and a new study raised the prospect that its drug could benefit heart disease as well. Banks fell as Moody’s Investors Service downgraded 10 small and midsize American lenders and said it may do the same with a handful of major firms.

Treasury 10-year yields dropped to around 4 per cent. Before the week is over, the bond market will have to digest the biggest round of refunding auctions since last year. Tuesday’s US$42 billion sale of three-year notes produced a lower-than-expected yield, a sign that demand was stronger than anticipated. The dollar rose. Oil rebounded after Ukrainian President Volodymyr Zelenskiy said his country would retaliate if Russia continues to block its ports.

The recent “orderly” pullback in U.S. stocks has reduced the risk of a chaotic selloff and reduced some of the short-term positioning risk that has been a worry for investors in recent weeks, Citigroup Inc. strategists said.

“This puts markets in a good set-up to make new gains or weather negative news/shocks in the coming weeks,” strategist Chris Montagu added.

Meantime, Deutsche Bank AG’s Bankim Chadha noted that while he’s sticking with his call for the S&P 500 to close the year around 4,500 — roughly where it currently is — he expects the gauge to push on toward 5,000 if the Federal Reserve can bring inflation down without triggering a recession.

FEDSPEAK, ECONOMY

Just a few days before a key inflation report, investors also waded through remarks from central bank officials. 

Fed Bank of Philadelphia President Patrick Harker said the central bank may be able to cease rate hikes, barring any surprises in the economy, though rates would need to stay at their current elevated levels for some time. Harker also noted that “sometime probably next year, we’ll start to bring the interest rates down.” His Richmond counterpart Thomas Barkin argued it was too soon to say whether another an increase in September would be appropriate.

To David Spika at GuideStone Capital Management, the restrictive policy imposed by the Fed will lead to economic weakness and a correction in equities. He noted that the market remains at a valuation “that just doesn’t make sense relative to where we are.”

We’re “in between the inflation spikes and the Fed hikes, but also waiting for the economy and profits to sour,” Meera Pandit at JPMorgan Asset Management told Bloomberg Television. “So I don’t know that there is a whole lot of upside catalyst in a world where profits are just better than feared, we need to see some more out of the profits landscape in order to get some more upside out of stocks that have already rallied really hard.”

In fact, some traders cited the fact that the equity market is also pulling back after a rally that drove the S&P 500 up almost 20 per cent this year. Sentiment recently hit the highest levels since the start of the year — a short-term bearish sign that has historically signaled a mild decline stocks.

The Bloomberg Intelligence Market Pulse Index, which acts as a contrarian signal, pushed into manic territory in July following three consecutive months in a neutral range. It’s a rare sign that has typically delivered weaker US equity returns over the next three months, with small caps underperforming their larger counterparts, data compiled by BI show.

“We still believe that stocks in general are prone to pullbacks in the magnitude of 5 per cent-10 per cent off the recent highs as we move through the second half of 2023,” said Dan Wantrobski at Janney Montgomery Scott. “Selling pressures will continually push the charts into oversold territory frequently, so be on alert for potentially powerful counter-trend moves in sessions ahead.”

Corporate Highlights:

• United Parcel Service Inc. lowered its full-year profit forecast and revealed plans to cut management jobs as the courier contends with shifting consumer habits and rising costs after a tentative labor agreement.
• Nvidia Corp. announced an updated AI processor that gives a jolt to the chip’s capacity and speed, seeking to cement the company’s dominance in a burgeoning market.
• Palantir Technologies Inc., the software maker that has for years sold artificial intelligence-powered programs to governments, fell after issuing a sales forecast that disappointed Wall Street.
• Dish Network Corp. is proposing to buy EchoStar Corp., the satellite network operator it once owned, in an all-stock deal as billionaire Charlie Ergen works to shift his struggling legacy pay-TV business empire toward a future in wireless communications.
• Robinhood Markets Inc. is cooperating with an investigation from New York’s top law enforcement office into “brokerage execution quality,” the retail trading firm said in a regulatory filing.

Key events this week:

• China CPI, PPI, money supply, new yuan loans and aggregate financing, Wednesday
• India rate decision, Thursday
• U.S. initial jobless claims, CPI, Thursday
• Atlanta Fed President Raphael Bostic pre-recorded remarks for employment webinar, Thursday
• UK industrial production, GDP, Friday
• U.S. University of Michigan consumer sentiment, PPI, Friday

Some of the main moves in markets:

Stocks

• The S&P 500 fell 0.4 per cent as of 4:01 p.m. New York time
• The Nasdaq 100 fell 0.9 per cent
• The Dow Jones Industrial Average fell 0.4 per cent
• The MSCI World index fell 0.6 per cent

Currencies

• The Bloomberg Dollar Spot Index rose 0.4 per cent
• The euro fell 0.4 per cent to US$1.0958
• The British pound fell 0.3 per cent to US$1.2746
• The Japanese yen fell 0.7 per cent to 143.43 per dollar

Cryptocurrencies

• Bitcoin rose 2.6 per cent to US$29,903.83
• Ether rose 1.9 per cent to US$1,859.69

Bonds

• The yield on 10-year Treasuries declined seven basis points to 4.02 per cent
• Germany’s 10-year yield declined 13 basis points to 2.47 per cent
• Britain’s 10-year yield declined eight basis points to 4.39 per cent

Commodities

• West Texas Intermediate crude rose 1.1 per cent to US$82.84 a barrel
• Gold futures fell 0.5 per cent to US$1,959.40 an ounce