(Bloomberg) — US stocks slumped for a second day in thin holiday trading and Treasury yields ticked higher, as hopes for a year-end rally faltered.
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The S&P 500 coughed up an early advance, with sentiment worsening on concern that the end of China’s zero-Covid policy could lead to a rise in cases around the world. Trading volumes were about 20% below the 30-day average at this time of day. The 10-year yield pushed to 3.86% and oil slumped. Tech shares remained under pressure in the US, even as Tesla Inc. sought to halt a seven-day rout prompted by concerns about ebbing demand. A gauge of the dollar erased losses.
The still-cautious mood is damping hopes for a rally in the last trading week of 2022 after a brutal year for financial markets. Global equities have lost a fifth of their value, the largest decline since 2008 on an annual basis, and an index of global bonds has slumped 16%. The dollar has surged 7% and the US 10-year yield has jumped to above 3.80% from just 1.5% at the end of 2021 as the Federal Reserve pursued an aggressive path of rate hikes to rein in inflation.
“We think investors have become way too pessimistic given where we are in the rate hiking cycle,” wrote Nancy Tengler, CEO and chief investment officer at Laffer Tengler Investments. Following one of the fastest rate-hiking regimes in history, “we expect the economy to slow materially or enter recession at some point in 2023. To be sure a severe recession would be bearish for stocks, yet given the resilience of the U.S. economy and the tight labor market, we are expecting a slowdown or shallow and brief recession. That could allow stocks to rally in the second half of 2023.”
In a bid to revive Hong Kong as a finance hub, the city will end some of its last major Covid rules, scrapping gathering limits to vaccination checks and testing for travelers. Still, while the dismantling of Covid curbs may be a boost for the global economy, there’s concern about inflation pressures that could prompt the policy makers in the US to maintain tight monetary policy.
Investors are also assessing Covid risks beyond China’s borders after almost half of the passengers on two flights to Milan were found to have the virus. Italian health authorities will begin testing all arrivals from China for Covid, and the Health Ministry said if a new strain is found, officials may impose stricter curbs on travel from China.
“Now that we’re almost a year into this bear market, at its low I think we were almost off 30%, we’ve seen enough to let us know that OK, we want to be on-guard for additional opportunities in that new year,” said Wells Fargo Investment Institute’s Sameer Samana on Bloomberg TV. On China reopening, “being as quickly as it’s happening probably complicates the Fed’s job with respect to putting a little bit of a bid under oil prices, putting a little bit of a bid under inflation globally, to aggregate demand. That’s going to be one of the biggest things that we’ll be watching in the first half.”
Effects of the Federal Reserves aggressive tightening policy is taking a toll on the housing market. Data Wednesday showed US pending home sales fell for a sixth month in November to the second-lowest on record. With borrowing costs roughly double where they were at the start of the year, home sales, and therefore prices, have been declining for months.
Elsewhere in markets, oil dipped amid thin liquidity as investors weighed the fallout from a Russian ban on exports to buyers that adhere to a price cap. Iron ore surged to its highest since early August, while copper gained in New York as China’s rollback of pandemic curbs boosted prospects for commodities demand in 2023.
Key events this week:
US initial jobless claims, Thursday
ECB publishes economic bulletin, Thursday
Some of the main moves in markets:
The S&P 500 fell 0.7% as of 12:49 p.m. New York time
The Nasdaq 100 fell 0.7%
The Dow Jones Industrial Average fell 0.7%
The MSCI World index fell 0.5%
The Bloomberg Dollar Spot Index was little changed
The euro fell 0.1% to $1.0625
The British pound was little changed at $1.2035
The Japanese yen fell 0.5% to 134.18 per dollar
Bitcoin fell 0.4% to $16,626.59
Ether fell 1.3% to $1,194.79
The yield on 10-year Treasuries advanced two basis points to 3.86%
Germany’s 10-year yield declined two basis points to 2.50%
Britain’s 10-year yield advanced two basis points to 3.66%
West Texas Intermediate crude fell 1.8% to $78.11 a barrel
Gold futures fell 0.6% to $1,812.40 an ounce
This story was produced with the assistance of Bloomberg Automation.
–With assistance from Richard Henderson, Robert Brand, Peyton Forte and Vildana Hajric.
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