Wall Street kicked off the week with losses, with both stocks and bonds down in signal that traders’ aggressive pricing of Federal Reserve rate cuts may have gone too far.
A raft of key jobs readings over the next few days will be closely watched for clues on the Fed’s next steps, with the potential to rekindle volatility that has recently shown signs of anemia. Technically “overbought” conditions and long positioning have left markets in a more fragile state after the impressive rallies in both Treasuries and equities last month.
“We’ve had the great rally and now it’s just kind of a chillax,” Tony Dwyer, chief market strategist at Canaccord Genuity, told Bloomberg Television. “Inflation is not the problem,” he noted, adding that he still expects to see a recession.
US stocks are headed for a rocky end to the year, according to Morgan Stanley’s Michael Wilson. The strategist said December could bring “near-term volatility in both rates and equities” before more constructive seasonal trends as well as the so-called “January effect” support stocks next month. JPMorgan Chase & Co.’s Mislav Matejka said markets expecting a soft landing leave no room for error.
“Perhaps one should be contrarian yet again,” Matejka said.
All major groups in the S&P 500 retreated, while the Nasdaq 100 dropped 1% on Monday. Treasury two-year yields, which are more sensitive to imminent Fed moves, rose nine basis points to 4.63%. The dollar gained. Bitcoin rose to as high as $42,000 as frenzied speculation in cryptocurrencies gathered pace.
The S&P 500 posted an average daily move of 0.3% in either direction last week, its tamest swings in half a year, as the market lost some momentum toward the end of its second-best November since 1980. The Cboe Volatility Index, also known as the VIX, fell toward the year’s lowest levels Friday, and stocks rose after Fed Chair Jerome Powell gave his clearest signal yet that officials have finished raising interest rates.
Warnings are piling up that the market is overheating, but “don’t fight the tape” still seems to be the motto for many traders in this last stretch of the year.
“Given that dealers are still positioned in positive gamma, there appears to be no immediate catalyst to disrupt the ongoing low-volatility environment,” say Tier1Alpha strategists. “If the S&P 500 begins to trend lower, market makers will have to mechanically buy the dip. Conversely, if the market trends higher, dealers will have to sell futures in order to maintain a delta-neutral position.”
Elsewhere, oil held a run of declines — after failing to sustain an early gain — amid continuing skepticism that the latest OPEC+ supply cuts will turn the market tide. Copper, zinc and nickel fell as industrial metals reversed some of the gains that were driven by optimism the Federal Reserve was moving closer to cutting rates.
Corporate Highlights:
Key events this week:
Some of the main moves in markets:
Stocks
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Cryptocurrencies
Bonds
Commodities
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