Cautious call on energy and small caps: Strategist
A rout in big tech weighed heavily on stocks, with gains in the broader market sputtering as a report showed Americans grew more downbeat about prospects for the economy.
Traders got another reality check Tuesday after a worrisome reading on consumer confidence. A gauge of expectations -- which reflects a six-month outlook -- tumbled to an almost decade low. The figures come at a time when analysts remain bullish about corporate earnings, with net-margin estimates for S&P 500 companies at a record high.
The bleak economic picture pushed the US equity benchmark lower, following gains that topped 1 per cent earlier in the day. Quarterly rebalancing of portfolios also fueled volatility. The tech-heavy Nasdaq 100 sank almost 3 per cent, dragged down by giants like Amazon.com Inc. and Tesla Inc. The dollar climbed, while Treasury 10-year yields fluctuated.
For Goldman Sachs Group Inc. strategists, margin forecasts are too optimistic, putting stocks at risk of more losses when Wall Street analysts downgrade their estimates. Meantime, HSBC Plc’s Max Kettner said equities aren’t still reflecting the impact of a potential recession, with earnings expectations at risk of being revised lower.
“The one thing that we can say with conviction is that high market volatility is likely to persist until there’s clear evidence that inflation is declining and the Fed pivots towards a less hawkish stance, taking the off-ramp away from the recession destination,” said Jason Draho, head of asset allocation for the Americas at UBS Global Wealth Management.
Federal Reserve officials played down the risk that the US economy will tip into a recession, even as they raise rates with another 75 basis-point hike on the table next month. New York Fed President John Williams and San Francisco’s Mary Daly both acknowledged they had to cool inflation, but insisted that a soft landing was still possible.
A key set of rates that the Fed is focusing on to help judge financial conditions is still some way from levels that might prompt officials to halt their tightening plans. Inflation-adjusted US rates at the shorter end of the curve are still mired below zero even as real rates on longer-tenor securities this month surged to levels unseen since 2019.
Meantime, Cathie Wood said she erred in her prediction that inflation would unravel as the prices of goods and services in the US soared to 40-year highs.
“We were wrong on one thing, and that was inflation being as sustained as it has been,” Wood, chief executive officer of Ark Investment Management, told CNBC. “Supply chain -- I can’t believe it’s taken more than two years, and Russia’s invasion of Ukraine, of course we couldn’t have seen that. So inflation has been a bigger problem. But I think that it has set us up for deflation.”
Elsewhere, oil rose for a third day as global output threats compound already red-hot markets for physical supplies, while the Group of Seven agreed to look into a price cap for Russian crude.
What to watch this week:
- US GDP, Wednesday
- ECB President Christine Lagarde, Federal Reserve Chair Jerome Powell, BOE Governor Andrew Bailey and Cleveland Fed President Loretta Mester due to speak at ECB event, Wednesday
- St. Louis Fed President James Bullard speaks, Wednesday
- China PMI, Thursday
- US personal income, PCE deflator, initial jobless claims, Thursday
- Eurozone CPI, Friday
- US construction spending, ISM Manufacturing, Friday
Some of the main moves in markets:
- The S&P 500 fell 1.9 per cent as of 3:11 p.m. New York time
- The Nasdaq 100 fell 2.9 per cent
- The Dow Jones Industrial Average fell 1.5 per cent
- The MSCI World index fell 1.2 per cent
- The Bloomberg Dollar Spot Index rose 0.5 per cent
- The euro fell 0.6 per cent to US$1.0521
- The British pound fell 0.7 per cent to US$1.2181
- The Japanese yen fell 0.6 per cent to 136.26 per dollar
- The yield on 10-year Treasuries was little changed at 3.20 per cent
- Germany’s 10-year yield advanced eight basis points to 1.63 per cent
- Britain’s 10-year yield advanced seven basis points to 2.46 per cent
- West Texas Intermediate crude rose 2.1 per cent to US$111.84 a barrel
- Gold futures fell 0.2 per cent to US$1,821.50 an ounce