Stocks push higher as traders parse U.S. Fed's promise

view original post

US stocks rose Friday, led by gains in technology companies, as traders parse comments from Federal Reserve officials reiterating that the central bank needs to do more to curb the hottest inflation in 40 years.

The S&P 500 drifted higher after Thursday’s plunge took US stocks to the lowest since late 2020. The tech-heavy Nasdaq 100 rose as Microsoft Corp. and Apple Inc. jumped at least 1 per cent each and Seagen Inc. soared after reports that Merck & Co Inc. is eyeing a purchase of the biotechnology firm. Friday also brings the quarterly event known as triple witching. The US$3.5 trillion options expiry has arrived with limited downside volatility so far. Treasury 10-year yields hovered around 3.2 per cent. The dollar snapped two days of losses.

Markets are rounding off a week buffeted by interest-rate increases, including the Federal Reserve’s biggest move since 1994, a shock Swiss National Bank hike and the latest boost in UK borrowing costs. The rate hikes are draining liquidity, sparking losses in a range of assets. Traders are still assessing the path of rate hikes the Federal Reserve could take and the impact that would have on the economy.

“You’re seeing this compression in the valuation of stocks as investors reassess what the interest rate’s going to be for the near term,” said Tom Hainlin, national investment strategist at US Bank Wealth Management. “And then we haven’t yet really seen any material revision in corporate profits that may result from higher interest rates.”

Federal Reserve Chair Jerome Powell said, on Friday, that the central bank is “acutely focused” on returning inflation to 2 per cent and that another 75 basis-point hike or 50 basis-point move was likely at the July meeting. Federal Reserve Bank of Kansas City President Esther George said she opposed the Fed’s Wednesday decision because the move, combined with the shrinking of the central bank’s balance sheet, creates uncertainty about the outlook.

“I think that we need to work on the basis that the macroeconomic and investment environment will remain potentially very fragile,” said Christian Nolting, Deutsche Bank’s private bank global chief investment officer. “Recovery will not be simple and, even on the most optimistic assumptions — for example, on Chinese economic reopening — issues such as supply-chain disruption will take time to fix.”

US factory production data for May pointed at cooler demand as output unexpectedly declined. Meanwhile, industrial production for May rose, but below the estimate.

Global stocks are facing one of their worst weeks since pandemic-induced turmoil of 2020 and some investors aren’t sure that assets have sunk far enough to price in the tightening cycle.

“Near-term recession has become a foregone conclusion for many investors; the only questions now are its duration and the severity of its impact on earnings,” Wells Fargo’s Chris Harvey wrote in a note.

Compared with the last two bear markets that were also associated with runaway inflation, the current one, at six months, has a long way to go, Harvey said. The 1980-1982 downturn lasted just over 20 months, as did the one between 1973 and 1974.

Bitcoin fell back below US$21,000, after snapping its longest streak of losses in Bloomberg data going back to 2010 earlier on Friday. In a sign of deepening turmoil in the crypto community, Babel Finance became the second major digital-asset lender this week to freeze withdrawals, telling clients it is facing “unusual liquidity pressures” as it contends with recent market declines. Oil fell as traders weighed the prospect of slower economic growth against tight supplies.

“The market continues to vacillate on the narrative of the year, between monetary normalization due to inflation and monetary policy error: a source of sustained volatility for equity valuations,” said Florian Ielpo, head of macro at Lombard Odier Asset Management.

US stocks attracted US$14.8 billion in the week to June 15, their sixth consecutive week of additions, according to Bank of America Corp., citing EPFR Global data. In total, US$16.6 billion flowed into equities globally in the period, while bonds had the largest redemptions since April 2020 and just over US$50 billion exited cash, the data showed. In a separate report, BofA raised European stocks to neutral from negative, saying the impact of economic news is now priced in.

LAGARDE’S PLEDGE

Italian bonds led a rally in European debt after European Central Bank President Christine Lagarde pledged that borrowing costs of more indebted nations in the euro-area won’t be allowed to spiral out of control. Italy’s 10-year yield fell as much as 20 basis points and German equivalents dropped five basis points.

Japan, meanwhile, retained super-easy monetary policy and yield curve control, defying pressure to track the global trend toward tighter settings. The yen sank and Japan’s 10-year bond yield retreated below the Bank of Japan’s cap of 0.25 per cent, after earlier hitting 0.265 per cent, the highest since 2016.

Some of the main moves in markets:

Stocks

  • The S&P 500 rose 0.7 per cent as of 2:05 p.m. New York time
  • The Nasdaq 100 rose 1.6 per cent
  • The Dow Jones Industrial Average rose 0.4 per cent
  • The MSCI World index fell 2.4 per cent

Currencies

  • The Bloomberg Dollar Spot Index rose 0.8 per cent
  • The euro fell 0.5 per cent to US$1.0496
  • The British pound fell 1.1 per cent to US$1.2220
  • The Japanese yen fell 2 per cent to 134.89 per dollar

Bonds

  • The yield on 10-year Treasuries advanced two basis points to 3.22 per cent
  • Germany’s 10-year yield declined five basis points to 1.66 per cent
  • Britain’s 10-year yield declined two basis points to 2.50 per cent

Commodities

  • West Texas Intermediate crude fell 7.7 per cent to US$108.51 a barrel
  • Gold futures fell 0.6 per cent to US$1,839.70 an ounce