(Bloomberg) — A sell-off in the riskier corners of the market deepened as the UK’s plan to shut down the economy fueled concerns about increased inflation that could lead to higher rates, fueling fears of a global shutdown. recession even worse.
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It has been a sea of red for stock trading agencies around the world, with the defeat in the S&P 500 pushing the meter within striking distance of the June bottom – which is about 0.5% below current levels. The lack of full capitulation could be a sign that the carnage isn’t over. Major companies such as Goldman Sachs Group Inc. are lowering their equity targets and warning that a dramatic upward shift in the outlook for rates will weigh on valuations.
As risk-out sentiment strengthened, Treasuries reversed a decline that previously pushed 10-year yields higher than 3.8%. The dollar hit an all-time high, sweeping other currencies aside. The euro plunged to its lowest point since 2002, while the pound hit its lowest point in 37 years — with former US Treasury Secretary Lawrence Summers saying ‘naive’ UK policies could create conditions for the pound to move past parity. down with the dollar.
“It looks like traders and investors will be throwing in the towel this week at some sort of event that feels like ‘the sky is falling’,” said Kenny Polcari, chief strategist at SlateStone Wealth. “Once everyone stops saying they ‘think a recession is coming’ and accepts it’s already here — then the psyche will change.”
The new British government of Liz Truss delivered the most sweeping tax cuts since 1972 at a time when the Bank of England struggles to contain inflation, which is nearly five times the target. The dip in government bonds means investors are now betting that the central bank will raise its benchmark interest rate by a full point in November to 3.25%, which would be the strongest rise since 1989.
Read: Biggest tax cuts in UK since 1972 lead to crash in pound, bonds
Amid heightened fears of a hard economic landing, commodities took a hit across the board. West Texas Intermediate fell below $80 a barrel for the first time since January and entered its fourth week of declines. Even gold, which is seen as a haven, failed to gain thanks to a rising dollar.
China’s yuan extended losses to a level closest to the weak end of its allowable trade band since a shocking devaluation of the currency in 2015. With an aggressive Federal Reserve set to support the dollar’s global strength, they say analysts say Beijing could do only so much to support its currency at a time of economic turmoil.
The dollar’s strength is unrelenting and will also put a “meaningful drag” on corporate earnings — which will be a major headwind for stocks, said David Rosenberg, founder of his eponymous research firm.
KKR & Co. sees potential problems ahead, including a mild recession next year, with the Fed narrowly focusing on raising unemployment to contain inflation. The US labor shortage is so severe that Fed tightening may not work, chief macro strategist Henry McVey wrote.
“This is a more draconian outcome than a decline in corporate earnings,” McVey said, “because it will encourage the Fed to tighten even further.”
Investors are flocking to cash, shunning nearly every other asset class as they become the most pessimistic since the global financial crisis, according to Bank of America Corp. Investor sentiment is “undeniably” the worst since the 2008 crisis, with government bond losses the highest since 1920, strategists led by Michael Hartnett wrote in a note.
“It’s a realization that interest rates here will continue to rise and that that will put pressure on earnings,” said Chris Gaffney, president of global markets at TIAA Bank. “Valuations are still a little high even though they’ve come down, interest rates have to go up a lot further and what impact will that have on the global economy — are we headed for a sharper recession than the one everyone expected? I think it’s a combination of all that, it’s not good news.”
Shares are indeed far from obvious bargains. At its low in June, the S&P 500 was trading at 18 times earnings, a multiple that surpassed valuations of all previous 11 bear cycles, data collected by Bloomberg shows. In other words, if stocks recover from here, this bear market bottom will have been the most expensive since the 1950s.
Gloomy sentiment is often considered a contrarian indicator for the US stock market, believing that extreme pessimism may have better times ahead. But history suggests that stock losses could accelerate even further before the current bear market ends, according to Ned Davis Research.
The company’s Crowd Sentiment Poll has been in an extremely pessimistic zone since April 11, or 112 consecutive trading days marking the third-longest period of gloom since the data began in 1995. In the months that followed those periods of extreme pessimistic sentiment, equity gains were volatile, with negative median returns three and six months after 100 days.
Another threat to equities is that out of several iterations of the so-called Fed model, which compares bond yields to returns on stocks, equities have been the least attractive compared to corporate and government bonds since 2009 and early 2010. This signal is getting attention from investors, who can now know they are looking to other markets for comparable or better returns.
The S&P 500’s plunge since its August peak is strengthening the downtrend channel since the bull market peaked in early January, according to Bloomberg Intelligence’s Gina Martin Adams. “The breakdown below 3,900 support leaves little for the index to understand as it tests its June lows,” she wrote.
Here are some of the key moves in markets:
The S&P 500 fell 1.9% as of 11:04 AM New York time
The Nasdaq 100 fell 1.7%
The Dow Jones Industrial Average fell 1.5%
The Stoxx Europe 600 fell 2.3%
The MSCI World Index fell 2.1%
The Bloomberg Dollar Spot Index rose 1.1%
The euro fell 1.3% to $0.9710
The British pound fell 3.1% to $1.0915
The Japanese yen fell 0.6% to 143.20 per dollar
Bitcoin fell 3.3% to $18,606.9
Ether fell 3.5% to $1,278.6
Yield on 10-Year Treasuries Has Changed Little at 3.71%
German 10-year yield rose four basis points to 2.01%
British 10-year yield rose 28 basis points to 3.78%
West Texas Intermediate crude fell 5.8% to $78.66 a barrel
Gold futures fell 1.7% to $1,652.70 an ounce
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