Stocks sank as Federal Reserve officials stressed that more rate hikes are coming, with risk appetite also hit by uncertainties around China’s Covid curbs and their impact on the global economy.

The S&P 500 pared its monthly gain as Fed Bank of St. Louis President James Bullard said markets may be underestimating the chances of higher rates while his New York counterpart John Williams noted policymakers have more work to do to curb inflation. Fed Vice Chair Lael Brainard said the string of supply shocks is keeping inflation risks elevated. 

Investors are now looking ahead to Jerome Powell’s speech Wednesday, with many economists expecting he’ll cement bets that the Fed will slow its pace of rate increases next month -- while reminding Americans that its fight against inflation will run into 2023.

“We expect Powell will push back more narrowly on market bets on early rate cuts that have once again crept a bit too far into 23, emphasizing that a stronger-for-longer labor market suggests that rates will need to be higher for longer,” wrote Krishna Guha, vice chairman of Evercore ISI.

As traders sought safety, the dollar rose alongside the Japanese yen. Investor anxiety also hit Bitcoin, with the crypto market digesting BlockFi Inc.’s bankruptcy filling. U.S.-listed Chinese shares rebounded from a selloff. Apple Inc. slid as Bloomberg News reported that turmoil in China is likely to result in a production shortfall of close to 6 million iPhone Pro units this year.

China’s woes complicate expectations of its path to reopening, with authorities deploying a heavy police presence in Beijing and Shanghai to deter a repeat of the weekend’s demonstrations. Chances are growing of a messy exit from the Covid Zero policy, analysts at Goldman Sachs Group Inc. warned.

“This is going to keep economic activity subdued in the country, and beyond,” said Fawad Razaqzada, market analyst at City Index and Forex.com. “The civil unrest is adding another layer of uncertainty over the economic situation there. It is certainly hurting investor sentiment across the financial markets.”

Just when the S&P 500 was trying to break above the highs of mid-November, sentiment turned negative, threatening the market’s recent momentum. Timing is most inconvenient here as the index approaches a crucial technical zone in the shape of both the 2022 downtrend and the 200-day moving average. Should the recent bullishness evaporate, short-term tactical bear trades might spark a bout of profit taking.

Stock markets are in for a wild ride next year as they don’t yet reflect the risk of a U.S. recession, according to strategists at Goldman Sachs and Deutsche Bank. Their calls are a warning after equities rallied sharply in the past two months on bets that a peak in inflation will lead to a softening of hawkish central bank policies.

BlackRock Inc.’s Chief Investment Officer Rick Rieder sees a chance for rates volatility to turn lower and provide a necessary, “though perhaps not sufficient” condition for stabilization in risk assets markets.

Stagflation is the key risk for the global economy in 2023, according to investors who said hopes of a rally in markets are premature following this year’s brutal selloff. Almost half of the 388 respondents to the latest MLIV Pulse survey said a scenario where growth continues to slow while inflation remains elevated will dominate globally next year.

Elsewhere, oil climbed as OPEC+ is seen considering deeper output cuts amid a faltering market.

Key events this week:

• Euro area economic confidence, consumer confidence, Tuesday
• U.S. Conference Board consumer confidence, Tuesday
• EIA crude oil inventory report, Wednesday
• China PMI, Wednesday
• Fed Chair Jerome Powell speech, Wednesday
• Fed releases its Beige Book, 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, Thursday
• U.S. unemployment, nonfarm payrolls, Friday
• ECB’s Christine Lagarde speaks, Friday

Some of the main moves in markets:

Stocks

• The S&P 500 fell 1.5 per cent as of 4 p.m. New York time
• The Nasdaq 100 fell 1.4 per cent
• The Dow Jones Industrial Average fell 1.4 per cent
• The MSCI World index fell 1.4 per cent

Currencies

• The Bloomberg Dollar Spot Index rose 0.6 per cent
• The euro fell 0.6 per cent to US$1.0336
• The British pound fell 1.2 per cent to US$1.1949
• The Japanese yen rose 0.2 per cent to 138.93 per dollar

Cryptocurrencies

• Bitcoin fell 1.9 per cent to US$16,252.51
• Ether fell 3.4 per cent to US$1,174.4

Bonds

• The yield on 10-year Treasuries advanced one basis point to 3.69 per cent
• Germany’s 10-year yield advanced two basis points to 1.99 per cent
• Britain’s 10-year yield was little changed at 3.13 per cent

Commodities

• West Texas Intermediate crude rose 0.8 per cent to US$76.87 a barrel
• Gold futures fell 0.8 per cent to US$1,754.50 an ounce