Stocks plunged into the Gathering’s reality test; Earning Bonds: Wrapping the Markets

(Bloomberg) — Stocks fell on Tuesday as a second-quarter rally met resistance from economic headwinds and signs of consolidation. Treasury bills advanced.

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US stocks fell as the S&P 500 retreated from a 14-month high reached last week. Nike fell on inventory concerns while PayPal Holdings Inc. rose. After reaching a loan agreement with KKR & Co.

Investors caught between fear of missing out and fears of overtaking the markets, too quickly deal with overvalued valuations and economic headwinds. Bullish positions in US stock futures grew last week, taking them to the broadest levels for the S&P 500 and Nasdaq 100 in data dating back to 2010, according to Citigroup strategists.

“In the short term, six to 12 months, we’re navigating treacherous waters,” Sebastian Page, chief investment officer at T Row Price, told Bloomberg Television. He added that growth stocks — especially those in the technology sector — were driven by a combination of factors, including “positive surprises” on revenue and advertising as well as excitement for artificial intelligence. “It’s all part of the value-for-growth equation.”

The trajectory of US monetary policy is another wild card. Federal Reserve Chairman Jerome Powell will submit his semi-annual report to Congress on Wednesday. Federal Reserve policymakers kept interest rates unchanged at their latest meeting but warned of further tightening ahead. Investors are also awaiting the outcome of policy meetings in Türkiye, the UK and Switzerland.

The Fed’s decision last week came with expectations that borrowing costs would rise 5.6% in 2023, which would mean a quarter-point or half-point increase in interest rates before the end of the year.

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That contrasts with the market pricing in around 20 basis points of tightening in the remainder of the year.

“In general, a multi-pronged environment is only accompanied by a drop in policy rate when earnings collapse,” writes Mike O’Rourke of Jones Trading. “It will take a reality check for equities along with economic headwinds before interest rate cuts can be seen. A high equity multiple and a high policy interest rate is not a relationship that can be sustained in the long term.”

US Treasury yields traded near session lows after bouncing amid an unexpected surge in housing starts in May, the most since 2016.

“This is solid data,” Sonal Desai, chief investment officer at Franklin Templeton Fixed Income, told Bloomberg TV. “It continues to feed the narrative that dwellings, new beginnings, will never be the first place that falls apart.”

Meanwhile, the Swedish Krona in global currencies fell to a record low against the euro as traders expect the Riksbank to push for interest rate hikes in the coming months.

Gold and oil fell after disappointment over Chinese stimulus measures. US-listed Chinese stocks also fell, with Alibaba Group Holding Ltd. down about 4.5% after the sudden replacement of its CEO and chairman.

Main events this week:

  • Louis Federal Reserve Bank of St. Louis President James Bullard speaks, Tuesday

  • New York Federal Reserve Bank President John Williams speaks on Tuesday

  • Federal Reserve Chairman Jerome Powell delivers semi-annual congressional testimony before the House Financial Services Committee, Wednesday

  • Chicago Federal Reserve President Austin Goolsby speaks Wednesday

  • Eurozone Consumer Confidence, Thursday

  • Price decisions in the UK, Switzerland, Indonesia, Norway, Mexico, the Philippines and Turkey on Thursday

  • The leading indicator of the US Congressional Council, Initial Jobless Claims, Current Account, Existing Home Sales, Thursday

  • Federal Reserve Chairman Jerome Powell delivers semi-annual congressional testimony before the Senate Banking Committee, Thursday

  • Cleveland Federal Reserve’s Loretta Mester speaks Thursday

  • Eurozone S&P Global Eurozone Manufacturing PMI, S&P Global Eurozone Services PMI, Friday

  • Japanese CPI, Friday

  • Standard & Poor’s Global Manufacturing Index in the US, Friday

  • Louis Federal Reserve Bank of St. Louis President James Bullard speaks on Friday

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Some of the major movements in the markets:

Stores

  • The S&P 500 is down 0.9% as of 10:26 a.m. New York time.

  • The Nasdaq 100 fell 0.7%.

  • The Dow Jones Industrial Average fell 1.1%.

  • The Stoxx Europe 600 fell 0.5%.

  • MSCI World Index fell 0.8%

currencies

  • The Bloomberg Spot Dollar Index rose 0.3%.

  • The euro fell 0.2 percent to $1.0904

  • The British pound fell 0.6 percent to $1.2721

  • The Japanese yen rose 0.2% to 141.67 against the dollar

Digital currencies

  • Bitcoin fell 0.1% to $26,679.78

  • Ether fell 0.9% to $1,714.98

bonds

  • The yield on the 10-year Treasury fell by five basis points, to 3.71%.

  • Germany’s 10-year yield fell 11 basis points, to 2.41%.

  • The yield on UK 10-year bonds fell 16 basis points to 4.34%.

goods

  • WTI fell 3% to $69.65 a barrel

  • Gold futures fell 1.4 percent to $1,943.50 an ounce

This story was produced with help from Bloomberg Automation.

– With assistance from Cecil Goucher.

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