(Bloomberg) — Wall Street kicked off the week with losses, with both stocks and bonds down in a signal that traders’ aggressive pricing of interest-rate cuts by the Federal Reserve may have gone too far.
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A slew of key jobs readings over the next few days will be closely watched for clues on the Fed’s next steps — with the potential to reignite volatility that has recently shown signs of anemia. Technically “overbought” conditions and long positioning have left markets in a more fragile state after the impressive rallies in both equities and Treasuries last month.
“We’ve had the great rally and now it’s just kind of a ‘chillax’,” Tony Dwyer at Canaccord Genuity told Bloomberg Television. “Inflation is not the problem,” he noted, adding that he still expects to see a recession.
To Morgan Stanley’s Michael Wilson, US stocks are headed for a rocky end to the year. The strategist said December could bring “near-term volatility in both rates and equities” before more constructive seasonal trends as well as the “January effect” support equities next month. JPMorgan Chase & Co.’s Mislav Matejka said markets expecting a soft landing leave no room for error.
“Perhaps one should be contrarian yet again,” Matejka said.
The S&P 500 fell about 1%, while the Nasdaq 100 underperformed amid a selloff in megacaps — with Nvidia Corp. and Meta Platforms Inc. down around 3%. Two-year US yields rose nine basis points to 4.63%. The dollar gained. Bitcoin topped $41,000 as frenzied speculation in cryptocurrencies gathered pace.
“We had a massive increase in interest rates that just haven’t totally hit the economy yet,” said Dana D’Auria at Envestnet Inc. “The market has a decent chance of slowing down next year. Does it mean it’s a massive crash? No, not necessarily. But I don’t advocate chasing after stocks and not being balanced in the way that you go to the market.”
Whether the economy settles in for a soft landing or spirals into something worse, both scenarios suggest lower rates are coming. Roughly 125 basis points of easing is now priced in through next year’s December Fed meeting — with about 50 basis points of cuts by June.
“Markets are approaching the limits of what can plausibly be priced without attaching material odds of a recession in the near term,” Goldman Sachs Group Inc. strategists including Praveen Korapaty, wrote.
Read: Treasury Strategists Debate Timing of Fed Cuts: Research Roundup
“To have so much in the way of rate cuts with a soft landing is curious,” Greg Peters at PGIM Fixed Income told Bloomberg Television. “It speaks to the positioning and the leaning of the market desiring rate cuts all the time.”
To Chris Larkin at E*Trade from Morgan Stanley, traders may be wondering if the market has gotten a little too complacent.
The closely watched bull-bear spread from the American Association of Individual Investors survey recently showed the most-bullish stance for the group since July, nearing levels not seen since April 2021, when the bull market was still raging.
Meantime, the S&P 500 posted an average daily move of 0.3% in either direction last week, its tamest swings in half a year, as the market lost some momentum toward the end of its second-best November since 1980. The Cboe Volatility Index, also known as the VIX, fell toward the year’s lowest levels Friday, and stocks rose after Fed Chair Jerome Powell gave his clearest signal yet that officials have finished raising interest rates.
“All eyes will be on Friday’s monthly jobs report to see if it confirms the cooling trend we saw most of last month,” Larkin said. “If it doesn’t, it may renew concerns the Fed’s 2024 pivot to rate cuts could be delayed.”
“Investors’ pleasure that US stocks have reached year-to-date highs may be tempered by more limited potential in many major stock market indexes for the coming year,” said Solita Marcelli at UBS Global Wealth Management, “We hold a neutral stance on equities in our global strategy — and identify most potential in quality stocks.”
While warnings are piling up that the market is overheating, “don’t fight the tape” still seems to be the motto for many traders in this last stretch of the year.
“Given that dealers are still positioned in positive gamma, there appears to be no immediate catalyst to disrupt the ongoing low-volatility environment,” say Tier1Alpha strategists. “If the S&P 500 begins to trend lower, market makers will have to mechanically buy the dip. Conversely, if the market trends higher, dealers will have to sell futures in order to maintain a delta-neutral position.”
If history is any guide, December is unlikely to bring heavy selling. Since 1950, it’s the third-best month of the year for the S&P 500, averaging a 1.4% gain, data compiled by the Stock Trader’s Almanac show.
After emerging from the prior 23 corrections since World War II, the S&P 500 rose an average 9.8% over a 127 calendar-day period before succumbing to another decline of 5% or more, according to Sam Stovall at CFRA. And when it did, the subsequent decline averaged 11%.
“As with all averages, these can also be a bit misleading, since two observations saw the market slip into another 5%+ decline immediately after recovering from the prior correction,” he noted. “However, while a handful of bear markets followed the successful conclusion of corrections, the vast majority were pullbacks and additional corrections.”
To Seema Shah at Principal Asset Management, 2024 should see many of the concerns and questions of recent years finally resolved.
“The long-awaited economic downturn should arrive and depart without leaving much destruction, and inflation should continue to decelerate,” she noted. “Most importantly, the Fed is likely to open the door to rate cuts, reducing the attractiveness of cash. Investors get ready: improved economic conditions should ignite a surge in sentiment—and there’s a massive $5.7 trillion mountain of cash to fuel the resulting rally in risk assets.”
Elsewhere, gold retreated from its record high amid signs that traders’ aggressive pricing of Fed rate cuts may have gone too far. Copper, zinc and nickel also retreated. Oil declined for the third straight session amid persistent skepticism that the latest OPEC+ supply cuts will tighten the market.
Corporate Highlights:
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Mark Zuckerberg is selling Meta Platforms Inc. stock for the first time in two years after the social media giant rapidly rebounded from a tumultuous 2022.
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Hawaiian Holdings Inc. agreed to be acquired by Alaska Air Group Inc. for $1.9 billion in cash and debt, in the latest attempt to consolidate the US aviation industry.
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Carvana Co., an online used-car dealer, was upgraded to neutral at JPMorgan amid improvements in “productivity, costs, and culture.”
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Lululemon Athletica Inc., an athletic-apparel brand, was cut to equal-weight at Wells Fargo, which said the valuation is “no longer cheap.”
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Virgin Galactic Holdings Inc. slumped after Richard Branson told the Financial Times that he doesn’t plan further investments in the space tourism company he founded.
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Spotify Technology SA is reducing its workforce by 17% in the company’s steepest cuts this year, part of an aggressive effort to shrink costs and drive profitability.
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Twilio Inc. will cut 5% of its workforce in its third major headcount reduction.
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Roche Holding AG agreed to pay as much as $3.1 billion for Carmot Therapeutics Inc., a developer of the new type of weight-loss treatments that’s sparked a pharma industry gold rush.
Key events this week:
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Japan Tokyo CPI, Tuesday
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China Caixin services PMI, Tuesday
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Eurozone S&P Global Services PMI, PPI, Tuesday
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US ISM Services, Job openings, Tuesday
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Eurozone retail sales, Wednesday
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Germany factory orders, Wednesday
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US ADP private payrolls, trade balance, Wednesday
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CEOs of the biggest banks on Wall Street, including JPMorgan, Citigroup, Goldman Sachs, Morgan Stanley and Bank of America, expected to testify on regulatory oversight to the Senate banking committee, Wednesday
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Bank of Canada monetary policy meeting, Wednesday
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Bank of England issues biannual stability report on UK financial system, holds news conference, Wednesday
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China trade, forex reserves, Thursday
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Eurozone GDP, Thursday
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Germany industrial production, Thursday
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US wholesale inventories, initial jobless claims, Thursday
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Germany CPI, Friday
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Japan household spending, GDP, Friday
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Reserve Bank of Australia’s head of financial stability Andrea Brischetto speaks at Sydney Banking and Financial Stability conference, Friday
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US jobs report, University of Michigan consumer sentiment, Friday
Some of the main moves in markets:
Stocks
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The S&P 500 fell 0.9% as of 11:30 a.m. New York time
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The Nasdaq 100 fell 1.6%
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The Dow Jones Industrial Average fell 0.4%
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The Stoxx Europe 600 fell 0.1%
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The MSCI World index fell 0.7%
Currencies
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The Bloomberg Dollar Spot Index rose 0.5%
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The euro fell 0.6% to $1.0821
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The British pound fell 0.7% to $1.2623
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The Japanese yen fell 0.2% to 147.13 per dollar
Cryptocurrencies
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Bitcoin rose 4.2% to $41,408.5
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Ether rose 1.6% to $2,218.36
Bonds
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The yield on 10-year Treasuries advanced nine basis points to 4.29%
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Germany’s 10-year yield was little changed at 2.35%
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Britain’s 10-year yield advanced six basis points to 4.20%
Commodities
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West Texas Intermediate crude was little changed
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Spot gold fell 2.3% to $2,023.55 an ounce
This story was produced with the assistance of Bloomberg Automation.
–With assistance from Cecile Gutscher, Sagarika Jaisinghani, Elena Popina, Jessica Menton, Carly Wanna, Michael Mackenzie, Liz Capo McCormick, Edward Bolingbroke and Michael Msika.
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