Stocks Trade Off Their Lows in the Run-up to Powell’s Speech: Markets Wrap

(Bloomberg) — Stocks trimmed most of their losses, with traders unwilling to make big bets ahead of Jerome Powell’s speech on Wednesday.

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Gains in energy, industrial and financial firms eased the slide in big tech. Amazon.com Inc. , which sells investment-grade debt, has seen its stock plunge. A measure that measures the global yield curve inverted for the first time in at least two decades – indicating a recession.

Powell is expected to reinforce expectations that the Fed will slow the pace of increases next month — while reminding Americans that its battle against inflation will continue into 2023. Some policymakers confirmed this week that they would raise borrowing costs further, with one key official saying he sees rates Trending somewhat higher than expected just a couple of months ago.

“The Fed has gone up enough — and fast enough — to make a recession the base case scenario in our book,” said Lorraine Goodwin, economist and portfolio strategist at New York Life Investments. “Volatility and risk returns are likely to remain high as long as the Fed fights inflation in slowing growth.”

Goodwin also noted that dividends usually don’t start to fall until a recession begins. This means, she added, that stock market fundamentals “may continue to deteriorate.”

Bloated US corporate profit margins are likely to start falling in 2023 as some expenses begin to return to normal, according to David Costin of Goldman Sachs Group. The company’s strategists, along with other banks including Morgan Stanley, say they see a slowdown in earnings growth next year.

Alicia Levine of BNY Mellon Wealth Management says that even in a shallow recession, S&P 500 companies can still see earnings drop by 20%.

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“There is still danger here in the end,” Levin told Bloomberg Television. “This is the transition year. Next year, ‘Okay, now your rates are higher, what does that mean for the real economy?’ And I think we really didn’t factor it in.”

Read: Barclays delays call for US recession, Fed cut amid strong data

READING: BofA says US yield curve will normalize on the Fed pivot

Kevin Phillip, a partner at Bel Air Investment Advisors, said the Fed’s actions, stubborn inflation, the war in Ukraine and corporate earnings expectations “make it a difficult narrative for the stock market over the next 12 months.”

Last week, institutional clients and hedge funds poured money into stocks, while retail clients sold for the fifth straight week — with selling likely to continue over the next month, according to Bank of America Corp. strategists led by Jill Carey-Hall.

The recent inflow momentum coupled with the lack of “capitulation-like outflows” indicates that investors believe the market has already bottomed out. But Bank of America strategists say they see more downside risks ahead of the first half from the 2023 bottom.

Several widely followed DeMark indicators, which attempt to predict long-term momentum and trend reversals, indicate that the Cboe Volatility Index may be poised for a reversal.

History shows that the emergence of the “Count Down 13” pattern has triggered a U-turn in the past, with a combination of these cues occurring at recent lows. The so-called fear gauge fell last week to its lowest level since August as the S&P 500 advanced.

Meanwhile, former dollar speculators including JPMorgan Asset Management and Morgan Stanley say the era of dollar strength is over as low rates prompted markets to reduce bets on further Fed tightening. This could mean buying opportunities for the currencies of Europe, Japan and emerging markets.

Main events this week:

• Crude Oil Inventory Report from the Energy Information Administration, Wednesday

• China PMI, Wed

• Fed Chairman Jerome Powell’s speech, Wednesday

• The Fed releases its Beige Book, Wednesday

• US Wholesale Inventories, GDP, Wed

• S&P Global PMIs, Thursday

• US Construction Spending, Consumer Income, Initial Jobless Claims, ISM Manufacturing, Thursday

• BOJ’s Haruhiko Kuroda speaks on Thursday

• US Unemployment, Nonfarm Payrolls, Friday

• Christine Lagarde of the European Central Bank speaks on Friday

Some of the major movements in the markets:

Stores

• The S&P 500 is down 0.2% as of 3:34 pm New York time.

• The Nasdaq 100 fell 0.7%.

• The Dow Jones Industrial Average changed little

• The MSCI World Index was little changed

currencies

• The Bloomberg Spot Dollar Index fell 0.1%.

• The euro fell 0.1 percent to $1.0329

• The British pound changed little at $1.1950

• The Japanese yen rose 0.2% to 138.71 per dollar

Digital currencies

• Bitcoin rose 1.6% to $16,451.38

• Ether rose 4% to $1,219.57

bonds

• The yield on the 10-year Treasury note advanced six basis points to 3.75%.

• Germany’s 10-year yield fell seven basis points to 1.92%.

• The yield on the 10-year British Bund fell three basis points to 3.10%.

goods

• West Texas Intermediate crude rose 1.6 percent to $78.44 a barrel

• Gold futures rose 0.5% to $1,763.30 an ounce

This story was produced with help from Bloomberg Automation.

— with assistance from Peyton Forte, Vildana Hajric, and Garfield Reynolds.

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