Stocks rally falter ahead of US inflation data: Markets Wrap

(Bloomberg) — Stocks struggled to gain momentum as traders awaited inflation data that will shape the outlook for the Federal Reserve’s next moves.

Most Read from Bloomberg

Stocks were slightly lower after recovering from Monday’s market rout that rattled trading around the world. While the consumer price index rose modestly in July, the annual measure is expected to continue rising at a slow pace. The recent easing of price pressures has boosted confidence among Federal Reserve officials that they can begin to lower borrowing costs as they refocus their attention on the labor market, which is showing greater signs of slowing.

For Chris Larkin of ETrade at Morgan Stanley, the inflation data comes at a pivotal moment for the stock market, which has been on the cusp of its most volatile week this year. In just a few weeks, the debate has shifted from whether the economy has slowed enough to concerns that it could get stuck in the mud.

“Investors will be looking for positive numbers – cool enough that no one doubts the possibility of a September rate cut, but warm enough to push aside the recession fears that have rocked markets recently,” Larkin said.

The S&P 500 was hovering around 5,330. The Chicago Mercantile Exchange Volatility Index (VIX) was holding fairly steady around 20. That’s after an unprecedented surge that took the index above 65 on Monday. The unusual spike has raised some questions about whether the index is actually “overstating” all this pressure on the U.S. stock market.

The 10-year Treasury yield rose 2 basis points to 3.96%.

Subscribe to the Bloomberg Daybreak podcast on Apple, Spotify, or wherever you listen.

Investors cut equity allocations at the fastest pace since the onset of the Covid pandemic during last week’s bout of market volatility, according to data from Deutsche Bank AG.

The overall allocation to stocks is now in the 31st percentile and underweight, strategists including Parag Thatte wrote in a note on Aug. 9. Just three weeks ago, exposure was at the top of its historical range at the 97th percentile.

The cut means corporate profits will slow to “low single digits” from an 11% gain in the second quarter, strategists said.

The story continues

At least one indicator suggests that the drama we witnessed last Monday looks more like a minor meltdown than a harbinger of worse things to come.

Consider the Chicago Board Options Exchange Volatility Index and the options-adjusted spread on the Bloomberg U.S. Corporate Bond Index. Based on the long-term relationship between the two, a close of around 39 on the volatility index a week ago should have corresponded to a reading of 3.5% in corporate bond spreads. Instead, the index ended much lower, around 1.32%.

The discrepancy between the two suggests the recent drop was technical rather than an indication of economic collapse, according to Bloomberg Intelligence strategists Christopher Keen and Michael Casper. In fact, such unnatural disconnects in the past have led to above-average returns for stocks over the next three to six months.

Goldman Sachs Group Inc.’s Scott Rubner says the decline in equity positions and the resumption of buybacks after a hiatus represent a short-term opportunity to buy the dip in U.S. stocks.

“I will be tactically shifting to bullish stocks on August 30,” Rubner wrote in a note to clients on Monday. “This will be my final bear market forecast for August as we end the worst of the August mismatch between supply and demand for stocks.”

Historical analysis of past growth concerns suggests that correlations between stocks and volatility “will only gradually normalize,” according to Goldman Sachs Group Inc. strategists led by David Kostin.

If economic concerns ease, “the recent sell-off represents an opportunity to buy stocks with healthy fundamentals at discounted prices,” they wrote.

Risk-reward ratios in equity markets remained mixed over the summer months on the back of weak business activity and a negative earnings revision, said JPMorgan Chase & Co strategists led by Mislav Matejka.

“The Fed will start cutting rates, but this may not lead to a sustained rise, as the cuts may be seen as reactive, and behind the curve,” they wrote.

A twin wave of economic uncertainty and a weak period for corporate earnings expectations is likely to cap stock market gains, said Michael Wilson of Morgan Stanley.

The strategist, who was among the most bearish voices on U.S. stocks until last year, said he expects the S&P 500 to trade in a range of 5,000 to 5,400 points in the absence of any clear signals from near-term macroeconomic data. The upper end of that range implies a gain of just 1% from current levels, while the lower end implies a decline of 6.4%.

Additionally, analyst downgrades are expected to outnumber upgrades in line with seasonal weakness, “one reason why the third quarter is typically the most challenging for stocks,” Wilson wrote in a note.

The company’s most prominent achievements:

• B. Riley Financial is facing a widening U.S. investigation into whether it gave investors an accurate picture of its financial health amid a string of losses and a falling share price.

• JetBlue Airways Corp. has begun selling $2.75 billion in bonds and loans backed by its loyalty program as the company seeks to raise reserves and fund general corporate purposes.

• Bank of Nova Scotia has agreed to buy a minority stake in KeyCorp, which was among the U.S. regional banks hardest hit in last year’s turmoil, for about $2.8 billion as part of a focus on North America.

• Vestas Wind Systems A/S has issued a profit warning for its full-year results, in a blow to the company’s efforts to recoup heavy losses in recent years.

• Starboard Value, an investment firm with a history of taking activist positions in companies, owns a stake in Starbucks, according to a report.

• Hawaiian Electric Industries Inc. has estimated losses from accumulating financial liabilities from one of the worst wildfires in U.S. history at $1.7 billion, and issued a warning about its ability to continue.

Main events this week:

• German ZEW survey forecast, Tuesday

• US Producer Price Index, Tuesday

• Fed’s Raphael Boucek speaks Tuesday

• Eurozone GDP, Industrial Production, Wednesday

• US CPI, Wednesday

• China housing prices, retail sales, industrial production, Thursday

• US Initial Jobless Claims, Retail Sales, Industrial Production, Thursday

• Alberto Musallam and Patrick Harker speak on Thursday.

• U.S. housing starts, University of Michigan consumer confidence index, Friday

• Federal Reserve Board Member Austin Goolsbee speaks Friday

Some key movements in the markets:

Stocks

• The S&P 500 was up 0.1% as of 9:38 a.m. ET in New York.

• The Nasdaq 100 rose 0.2%.

• The Dow Jones Industrial Average was little changed.

• The Stoxx Europe 600 index rose 0.1%.

• The MSCI World Index saw little change.

Currencies

• The Bloomberg Dollar Index rose 0.1%.

• The euro rose 0.1% to $1.0928.

• The pound was little changed at $1.2773.

• The Japanese yen fell 1% to 148.14 yen per dollar.

Cryptocurrencies

• Bitcoin rose 1.4% to $59,364.59

• Ether price rose 5% to $2,685.61

Bonds

• The yield on the 10-year US Treasury note rose two basis points to 3.96%.

• The yield on German 10-year bonds rose three basis points to 2.25%.

• The yield on 10-year British bonds rose one basis point to 3.96%.

Goods

• West Texas Intermediate crude rose 1.7% to $78.13 a barrel.

• Spot gold rose 0.8 percent to $2,450.81 an ounce.

This story was produced with the help of Bloomberg Automation.

–With assistance from John Viljoen and Matthew Burgess.

Most Read from Bloomberg Businessweek

©2024 Bloomberg LP