BNN Bloomberg's closing bell update: October 19, 2022
Stock traders balked at any rebound attempt on Wednesday, with Treasury yields creeping back to multiyear highs and mounting concern that a hawkish Federal Reserve will raise the odds of a hard landing.
The day that marked the 35th anniversary of the equity crash saw the market halting a back-to-back rally, making any calls for an imminent bottom look elusive. Not even bright earnings spots like Netflix Inc. and United Airlines Holdings Inc. were able to enthuse investors about more gains in the S&P 500. Tesla Inc.’s slide in late trading on disappointing sales could further weigh on sentiment.
“Earnings are not allowing us to see that capitulation and resetting of 2023 earnings expectations yet,” Morgan Stanley’s Lisa Shalett told Bloomberg Television. “It’s not yet a clearing event that sets up for a durable, viable bottom in this market.”
To Nicholas Colas at DataTrek Research, a more durable advance would require a backdrop of stabilizing yields -- which was the setup for the two-month surge in the S&P 500 that started in mid-June.
That seems like a “tall order” given that Fed policy remains tight and bond rates are stuck at such high levels, he noted.
Treasuries saw a renewed wave of selling, spurred by firmer global inflation readings, corporate deal hedging flows and a poorly received U.S. 20-year bond auction. The two-year yield jumped to the highest since 2007 as traders pushed expectations for the peak policy rate closer to 5 per cent -- from a current range between 3 per cent and 3.25 per cent.
Fed Bank of Minneapolis President Neel Kashkari said that the central bank could potentially pause its rate increases at some point next year if policymakers see clear evidence that core inflation is slowing. However, he made it clear that he sees no evidence yet to give him “comfort” that core prices are moderating.
His St. Louis counterpart James Bullard said it’s good news that markets are pricing in anticipated hikes, making it important that officials “follow through” and implement those increases to curb high inflation.
In another sign of economic jitters, a Bank of America Corp. survey showed 60 per cent of chief investment officers want companies to use cash reserves to improve their balance sheets -- rather than opting for capital expenditures or stock buybacks.
The economy will probably mostly slow in 2023, so companies have time to use “still strong cash flow generation this year to shore up their balance sheets before a potential recession hits next year,” wrote credit strategist Yuri Seliger.
As the third-quarter earnings season gets underway, a nightmare scenario for stock pickers is unfolding. The S&P 500’s three-month realized correlation -- a gauge of how closely the top weighted stocks in the benchmark move relative to each other -- is at its highest level since July 2020. As correlations rise, it becomes increasingly difficult for fund managers to outperform the broader market.
For anyone attempting to catch a bottom in stocks, history shows that the last innings of bear markets typically inflict a lot of pain on stock investors. That means more turbulence may lie ahead since the S&P 500’s drop over the past six months looks tame when compared with they type of declines typically seen in the last half-year of major equity downturns, according to Bespoke Investment Group.
“Oversold conditions coinciding with key support has recently underpinned a recovery in stocks, leaving many investors wondering if this will be another trick or a potential treat?” said Craig Johnson, chief market technician at Piper Sandler. “From our technical perspective, risk for another trick appears high as there is insufficient evidence to confirm the equity market has fully capitulated. This does not eliminate the probability of a sizable relief rally developing into year-end.”
Key events this week:
- U.S. existing home sales, initial jobless claims, Conference Board leading index, Thursday
- Euro area consumer confidence, Friday
Some of the main moves in markets:
- The S&P 500 fell 0.7 per cent as of 4 p.m. New York time
- The Nasdaq 100 fell 0.4 per cent
- The Dow Jones Industrial Average fell 0.3 per cent
- The MSCI World index fell 0.9 per cent
- The Bloomberg Dollar Spot Index rose 0.6 per cent
- The euro fell 0.9 per cent to US$0.9773
- The British pound fell 0.9 per cent to US$1.1223
- The Japanese yen fell 0.4 per cent to 149.87 per dollar
- Bitcoin fell 0.7 per cent to US$19,226.67
- Ether fell 1.4 per cent to US$1,296.2
- The yield on 10-year Treasuries advanced 12 basis points to 4.13 per cent
- Germany’s 10-year yield advanced nine basis points to 2.38 per cent
- Britain’s 10-year yield declined seven basis points to 3.88 per cent
- West Texas Intermediate crude rose 3.5 per cent to US$85.69 a barrel
- Gold futures fell 1.3 per cent to US$1,634.30 an ounce