Stocks, Bonds Get ‘Chillax’ Moment After Rally: Markets Wrap

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.

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“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:

Mark Zuckerberg is selling Meta Platforms Inc. stock for the first time in two years after the social media giant rapidly rebounded from a tumultuous 2022.
Alaska Air Group Inc. agreed to buy rival Hawaiian Holdings Inc. for $1.9 billion in cash and debt, challenging the Biden administration’s aggressive stance on mergers that has already derailed one partnership between carriers.
Carvana Co., an online used-car dealer, was upgraded to neutral at JPMorgan amid improvements in “productivity, costs, and culture.”
Lululemon Athletica Inc., an athletic-apparel brand, was cut to equal-weight at Wells Fargo, which said the valuation is “no longer cheap.”
Virgin Galactic Holdings Inc. slumped after Richard Branson told the Financial Times that he doesn’t plan further investments in the space tourism company he founded.
Roche Holding AG agreed to pay as much as $3.1 billion for Carmot Therapeutics Inc., a developer of the new type of weight-loss treatments that’s sparked a pharma industry gold rush.
Spotify Technology SA is cutting 17% of its workforce, marking at least the third time that the streaming service has carried out mass layoffs this year in an effort to shrink costs and drive profitability.

Key events this week:

Japan Tokyo CPI, Tuesday
China Caixin services PMI, Tuesday
Eurozone S&P Global Services PMI, PPI, Tuesday
US ISM Services, Job openings, Tuesday
Eurozone retail sales, Wednesday
Germany factory orders, Wednesday
US ADP private payrolls, trade balance, Wednesday
CEOs of the biggest banks on Wall Street, including JPMorgan, Citigroup, Goldman Sachs, Morgan Stanley and Bank of America, expected to testify on regulatory oversight to the Senate banking committee, Wednesday
Bank of Canada monetary policy meeting, Wednesday
Bank of England issues biannual stability report on UK financial system, holds news conference, Wednesday
China trade, forex reserves, Thursday
Eurozone GDP, Thursday
Germany industrial production, Thursday
US wholesale inventories, initial jobless claims, Thursday
Germany CPI, Friday
Japan household spending, GDP, Friday
Reserve Bank of Australia’s head of financial stability Andrea Brischetto speaks at Sydney Banking and Financial Stability conference, Friday
US jobs report, University of Michigan consumer sentiment, Friday