(Bloomberg) — U.S. stocks fell for a second straight day in year-end trade and Treasury bond yields rose as hopes for a year-end rally falter.
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The S&P 500 coughed up an early advance after sentiment worsened on concern that the end of China’s Covid-zero policy could lead to a surge in cases across the world. Trading volumes were about 20% below the 30-day average at this time of day. The 10-year yield rose to 3.88% and oil fell. Tech stocks remained under pressure in the US even as Tesla Inc. tried to stop a seven-day rout driven by concerns about falling demand. A dollar meter erased the losses.
The still cautious mood is dampening hopes for a rally in the last trading week of 2022, after a brutal year for financial markets. Global equities lost a fifth of their value, the biggest annual drop since 2008, and a global bond index fell 16%. The dollar rose 7% and the US 10-year yield jumped to more than 3.80%, from just 1.5% at the end of 2021, as the Federal Reserve pursued an aggressive course of raising rates to curb inflation.
“We think investors have become too bearish given where we are in the rate hike cycle,” wrote Nancy Tengler, CEO and chief investment officer at Laffer Tengler Investments. After one of the fastest rate hike regimes in history, “we expect the economy to slow significantly or enter a recession sometime in 2023. To be sure, a severe recession would be bearish for equities, but given the resilience of the US economy and the tight job market, we expect a shallow and brief downturn or recession. This could allow stocks to rise in the second half of 2023.”
In a bid to revive Hong Kong as a financial hub, the city will end some of its last major Covid rules, scrapping collection limits for vaccination checks and testing for travellers. Still, while the dismantling of Covid restrictions could be a boost to the global economy, there is concern about inflationary pressures that could push policymakers in the US to stick to tight monetary policy.
Investors are also weighing Covid risks beyond China’s borders after nearly half of passengers on two flights to Milan were diagnosed with the virus. Italian health authorities will start testing all arrivals from China for Covid, and the health ministry has said that if a new strain is found, authorities may impose tighter restrictions on travel from China.
“Now that we’re almost a year into this bear market, its bear market, I think we’re down about 30%, we’ve seen enough to let us know that, OK, we want to be on the lookout for additional opportunities in this new year,” said Sameer Samana of Wells Fargo Investment Institute, on Bloomberg TV. On the reopening of China, “being as fast as it’s happening probably complicates the Fed’s job in terms of putting some supply under oil prices, putting some supply under inflation globally, to add demand. That’s going to be one of the biggest things we’re going to be watching in the first half.”
The Fed’s aggressive tightening policy is hurting the housing market. Data from Wednesday showed that pending US home sales fell for a sixth month in November to the second-lowest level on record. With borrowing costs nearly doubling from the start of the year, home sales, and therefore prices, have been falling for months.
Elsewhere, crude fell amid tight liquidity as investors weighed the fallout from a Russian ban on exports to buyers adhering to a price cap.
This week’s main events:
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US Initial Jobless Claims, Thursday
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ECB publishes economic bulletin, Thursday
Some of the main movements in the markets:
Actions
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The S&P 500 was down 0.8% by 2:30 pm New York time
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Nasdaq 100 down 1%
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The Dow Jones Industrial Average is down 0.7%
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The MSCI World Index is down 0.6%
Coins
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The Bloomberg Dollar Spot Index rose 0.1%
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The euro dropped 0.1% to $1.0626
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Pound Sterling Little Changed at $1.2034
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The Japanese yen fell 0.6% to 134.34 to the dollar
Cryptocurrencies
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Bitcoin dropped 0.5% to $16,601.38
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Ether dropped 1.4% to $1,194.27
Titles
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The 10-year Treasury yield rose four basis points to 3.88%
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Germany’s 10-year yield fell two basis points to 2.50%
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Britain’s 10-year yield advanced two basis points to 3.66%
Commodities
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West Texas Intermediate crude fell 0.8% to $78.88 a barrel
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Gold futures fell 0.5% to $1,813.10 an ounce
This story was produced with the help of Bloomberg Automation.
–With assistance from Richard Henderson, Robert Brand, Peyton Forte and Vildana Hajric.
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