Sunday, September 25, 2022

Volatility Grips Stocks After Powell’s Remarks: Markets Wrap

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(Bloomberg) — Volatility gripped the stock market after Jerome Powell’s remarks did little to alter bets on another super-sized rate hike during the Federal Reserve’s September gathering.

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The S&P 500 pushed lower after swinging between gains and losses as the Fed’s boss reprised his hawkish views from the Jackson Hole conference in late August, saying officials are strongly committed to their fight against inflation. The yield of the policy-sensitive two-year note jumped by seven basis points to 3.5%. Swap traders priced in odds of around four-in-five that officials will implement a 75-basis-point hike on Sept. 21 instead of just 50 basis points.

Powell said the US central bank will not flinch in its efforts to curb inflation “until the job is done.” “We need to act now, forthrightly, strongly as we have been doing,” he noted Thursday in remarks at the Cato Institute’s monetary policy conference in Washington. “It is very important that inflation expectations remain anchored,” Powell said, adding that “what we hope to achieve is a period of growth below trend,” which will cause the labor market to get back into better balance.

“Fedspeak has once again injected volatility (after all, it is September) into the rangebound environment,” wrote Julian Emanuel, chief equity and quantitative strategist at Evercore, highlighting that “Powell’s view that the ‘clock is ticking’ on intolerably high inflation expectations becoming part of the American consumer’s behavioral norm.”

Europe’s bonds slid after the region’s central bank said it would remove a cap on how much interest government deposits can earn as it lifted rates above 0% for the first time in a decade. That reduces the incentive to shift billions of euros of public money from cash into short-term debt, driving a selloff that took the yield on two-year German bonds up much as 21 basis points to 1.31%.

European Central Bank officials are prepared to raise interest rates by another three-quarters of a point at October’s meeting if the inflation outlook warrants an additional big step, according to people familiar with the debate.

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Seasoned investors, staring at a world clouded by war, inflation and economic uncertainty, are buying catastrophe insurance at a record clip. Institutional traders paid a total of $8.1 billion to initiate purchases of equity puts last week, the highest premium in at least 22 years, Options Clearing Corp. data compiled by Sundial Capital Research show. Adjusted for market capitalization, demand for hedges matches levels from the 2008 financial crisis.

US stocks could slide a further 25% if the economy tips into recession, with risks to a sustained equity rally mounting, according to Deutsche Bank AG strategists. With company profits set to drop, valuations still high and recession risks looming, the fundamental picture is challenging, strategists led by Binky Chadha wrote in a note dated Sept. 7. His base-case scenario still sees shares rising by year-end.

On the economic front, applications for US unemployment insurance fell for a fourth straight week to the lowest since May, suggesting demand for workers remains healthy despite an uncertain economic outlook. Meanwhile, Mortgage rates in the US climbed for the third week in a row, reaching the highest level since 2008 and squeezing affordability as the US housing slowdown deepens.

Among corporate highlights, GameStop Corp. jumped after the video game retailer announced a partnership with cryptocurrency exchange FTX US. Amylyx Pharmaceuticals Inc. surged as its controversial treatment for amyotrophic lateral sclerosis won the support of a panel of US regulatory advisers. Tesla Inc.’s China operations are back in full swing after an upgrade to its factory in Shanghai and a Covid-19 lockdown in the city slowed production earlier this year.

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Some of the main moves in markets:

Stocks

  • The S&P 500 fell 0.5% as of 12:11 p.m. New York time

  • The Nasdaq 100 fell 0.8%

  • The Dow Jones Industrial Average fell 0.5%

  • The MSCI World index was little changed

Currencies

  • The Bloomberg Dollar Spot Index rose 0.4%

  • The euro fell 0.6% to $0.9945

  • The British pound fell 0.6% to $1.1464

  • The Japanese yen fell 0.3% to 144.18 per dollar

Bonds

  • The yield on 10-year Treasuries advanced three basis points to 3.29%

  • Germany’s 10-year yield advanced 14 basis points to 1.72%

  • Britain’s 10-year yield advanced 11 basis points to 3.15%

Commodities

  • West Texas Intermediate crude rose 1.4% to $83.10 a barrel

  • Gold futures fell 0.7% to $1,716.50 an ounce

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