Stocks and Bonds Get a ‘Quiet’ Moment After Rally: Markets Wrap

(Bloomberg) — Wall Street started the week with losses, with stocks and bonds falling in a sign that traders’ aggressive pricing of Federal Reserve interest rate cuts may have gone too far.

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A host of key jobs readings over the next few days will be closely watched for clues about the Fed’s next moves, with the potential to reignite volatility that has recently shown signs of anemia. Technically “overbought” conditions and long positions have left markets in a more fragile state following impressive rallies in both stocks and Treasuries last month.

“We had a big rally and now it’s just kind of calmed down,” Tony Dwyer, chief market strategist at Canaccord Genuity, told Bloomberg TV. “Inflation is not the problem,” he noted, adding that he still expects to see a recession.

For Michael Wilson of Morgan Stanley, US stocks are heading towards a difficult end to the year. The strategist said December could bring “near-term volatility in both interest rates and stocks” ahead of more constructive seasonal trends as well as a “January effect” that supports stocks next month. Mislav Matejka, of JPMorgan Chase & Co., said markets were expecting a soft landing that left no room for error.

“Maybe one should be contrarian again,” Matejka said.

The S&P 500 fell about 1%, while the Nasdaq 100 underperformed amid a massive stock selloff — with Nvidia Corp. falling. and Meta Platforms Inc. By about 3%. Two-year US bond yields rose nine basis points to 4.63%. The dollar rose. The price of Bitcoin has surpassed $41,000 as speculation in cryptocurrencies grows more frenzied.

“We’ve seen a massive increase in interest rates that hasn’t fully impacted the economy yet,” said Dana Doria of Envestnet Inc. “The market has a good chance of slowing down next year. Does that mean it’s a massive crash? No, not necessarily. But I’m not in favor of chasing stocks and not balancing the way you go to the market.”

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Whether the economy settles into a soft landing or escalates into something worse, both scenarios indicate that interest rate cuts are coming, perhaps as soon as March. Current market expectations call for monetary policy easing of more than 100 basis points next year, a trend that appears to be setting the stage for lower yields and an extended rally.

Read: Treasury strategists discuss timing of Fed cuts: research report

According to Chris Larkin of Morgan Stanley’s E*Trade, traders may be wondering if the market has become a little complacent.

A closely watched bull spread from a recent American Association of Individual Investors survey showed the group’s most bullish position since July, approaching levels not seen since April 2021, when the bull market was still raging.

Meanwhile, the S&P 500 posted an average daily move of 0.3% in either direction last week, its lowest volatility in half a year, as the market lost some momentum toward the end of its second-best November since 1980. The VIX, also known as the VIX, edged toward its lowest levels this year on Friday, and stocks rose after Federal Reserve Chairman Jerome Powell gave his clearest signal yet that officials were done raising interest rates.

“All eyes will be on Friday’s monthly jobs report to see if it confirms the slowing trend we have seen for most of the past month,” Larkin said. “If not, this could renew concerns that the Fed’s 2024 pivot to rate cuts could be delayed.”

“Investor delight in US equities reaching year-to-date highs may be tempered by limited potential in several key equity market indices for next year,” said Soletta Marcelli, of UBS Global Wealth Management. “We maintain a neutral stance on equities in our global strategy – identifying most Potential in High-Quality Stocks We see particular value in US technology; stable income and high-quality cyclical stocks in Europe; and in select names in Asia.

While warnings of the market overheating pile up, it seems that “don’t fight the tape” is still the mantra for many traders in this final period of the year.

“Given that traders remain positioned in a positive range, there appears to be no immediate catalyst to disrupt the ongoing low volatility environment,” say Tier1Alpha strategists. “If the S&P 500 starts trending down, market makers will have to automatically buy the dip. Conversely, if the market trends higher, traders 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, this has been the third-best month of the year for the S&P 500, with an average gain of 1.4%, according to data collected by the Stock Traders Almanac View.

After emerging from the previous 23 corrections since World War II, the S&P 500 rose an average of 9.8% over 127 calendar days before succumbing to another decline of 5% or more, according to CFRA’s Sam Stovall. When this happened, the subsequent decline averaged 11%.

“As with all averages, these can also be a bit misleading, since two observations saw the market slide into another 5%+ decline immediately after recovering from the previous correction,” he noted. “However, while a few bear markets followed the successful end of corrections, the vast majority were additional pullbacks and corrections.”

The most prominent features of the company:

• Mark Zuckerberg sells shares of Meta Platforms Inc. For the first time in two years after the social media giant quickly rebounded from a turbulent 2022.

• Hawaiian Holdings Inc. agreed. On the acquisition of Alaska Air Group Inc. For $1.9 billion in cash and debt, in the latest attempt to boost the US aviation industry.

• Carvana, an online used car seller, has been upgraded to neutral at JP Morgan amid improvements in “productivity, costs and culture”.

• Lululemon Athletica Inc, an athletic apparel brand, was downgraded to equal weight at Wells Fargo, which said the valuation was “no longer cheap.”

• Virgin Galactic Holdings Inc. fell. After Richard Branson told the Financial Times that he does not plan further investments in the space tourism company he founded.

• Spotify Technology SA is cutting its workforce by 17% in the company’s biggest cuts so far this year, part of an intensified effort to trim costs and increase profitability.

• Roche Holding AG has agreed to pay up to $3.1 billion for Carmot Therapeutics Inc., a developer of a new type of weight-loss treatment that sparked a gold rush in the pharmaceutical industry.

Main events this week:

• Consumer price index in Tokyo, Japan, Tuesday

• China Caixin Services PMI, Tuesday

• Eurozone S&P Global Services PMI, Producer Price Index, Tuesday

• American ISM Services, Job Opportunities, Tuesday

• Retail sales in the euro zone, Wednesday

• German factory orders on Wednesday

• US private sector employment report ADP, trade balance, Wednesday

• The CEOs of Wall Street’s biggest banks, including JPMorgan, Citigroup, Goldman Sachs, Morgan Stanley and Bank of America, are expected to testify about regulatory oversight before the Senate Banking Committee on Wednesday.

• Bank of Canada monetary policy meeting on Wednesday

• The Bank of England releases its semi-annual report on the stability of the UK financial system and holds a press conference on Wednesday

• Chinese trade, foreign exchange reserves, Thursday

• Eurozone GDP, Thursday

• German industrial production, Thursday

• US Wholesale Inventories, Initial Jobless Claims, Thursday

• German Consumer Price Index, Friday

• Japanese household spending, GDP, Friday

• RBA Chief Financial Stability Officer Andrea Brichetto speaks at the Sydney Banking and Financial Stability Conference, Friday

• US jobs report, consumer confidence from the University of Michigan, Friday

Some key movements in the markets:

Stores

• The S&P 500 was down 1% as of 10:31 a.m. New York time

• The Nasdaq 100 index fell 1.7%.

• The Dow Jones Industrial Average fell 0.4%

• The Stoxx Europe 600 index was little changed

• MSCI World Index fell 0.7%

Currencies

• The Bloomberg Dollar Spot Index rose 0.5%.

• The euro fell 0.6 percent to $1.0816

• The British pound fell 0.7 percent to $1.2619

• There was little change in the Japanese yen at 146.92 to the dollar

Digital currencies

• Bitcoin rose 4.3% to $41,424.08

• Ethereum rose 1.4% to $2,213.5

Bonds

• The yield on the 10-year Treasury note rose seven basis points to 4.27%.

• The yield on German 10-year bonds fell by three basis points to 2.33%.

• The yield on British 10-year bonds rose two basis points to 4.16%.

Goods

• West Texas Intermediate crude rose 0.2% to $74.24 a barrel

• Gold fell in spot transactions by 2 percent to $2,031.09 per ounce

This story was produced with assistance from Bloomberg Automation.

–With assistance from Cecile Goucher, Sagarika Jaisinghani, Elena Popina, Jessica Minton, and Carly Wanna.

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