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Stocks Rally as Swap Traders Dial Back Fed Wagers: Markets Wrap

Stocks Rally as Swap Traders Dial Back Fed Wagers: Markets Wrap
Pedestrians are reflected in an electronic stock board outside a securities firm in Tokyo, Japan, on Thursday, Aug. 30, 2018. Japan's Topix index closed lower after fluctuating as investors assessed trade frictions and geopolitical risks. Photographer: Kiyoshi Ota/Bloomberg

The stock market snapped back at the end of a dizzying week as traders reduced their bets on a Federal Reserve hike while parsing a raft of Wall Street earnings and hoping for signs of capitulation that could set the stage for a more sustained recovery.

American equities halted a five-day slide, with swaps pricing in 80 basis points of Fed tightening in July — still an aggressive boost that leaves investors wondering about the odds of a recession — but down from a full point earlier this week. Banks led gains after Citigroup Inc.’s blowout results. The dollar and bond yields fell.

Economic readings were all over the place, but it was a drop in US consumer long-term inflation expectations to a one-year low that effectively captured traders’ attention. The reason is it may provide some solace to policy makers that current price pressures aren’t becoming entrenched.

Another reason for hope is that two Fed officials didn’t sound too keen on a full-point hike in July. Speaking separately, Atlanta Fed President Raphael Bostic voiced wariness of a super-sized rate increase, and St. Louis’s James Bullard said he would defer judgment to the central bank’s meeting. He was quoted earlier this week as saying he favored sticking with a 75-basis-point boost.

Read: Fed’s Daly: Inflation Too High, No Worry of ‘Overcooking’ Policy

“While a recession is increasingly likely, bulls note that a lot of bad news is already being priced in, and if a recession is shallow, there is upside to markets over the next year,” said Mark Hackett, chief of investment research at Nationwide. “The path to get there may not be pleasant, but if earnings can hold up, there is reason for cautious optimism.”

Odds are now close to even that the US will slip into a recession within the next year. The probability of a downturn over the next 12 months stands at 47.5%, up sharply from 30% odds in June, according to the latest Bloomberg monthly survey of economists.

US stocks could see more declines as the risk of a hard recession and a stronger dollar rises in the second half of the year, according to Bank of America Corp. strategists. Equity markets could see “proper capitulation” if the second-quarter earnings season is worse than expected, strategists led by Michael Hartnett wrote.

“The markets today reflect a slowdown or a mild recession already,” said Kara Murphy, chief investment officer at Kestra Holdings. “As soon as we have confirmation that the Fed is winning the war with inflation — that means we need to see multiple data points suggesting that prices are slowing — I think that will be a risk-on sign for the market.”

In other corporate news, Wells Fargo & Co. said it will continue to do share repurchases, but it’ll be “prudent,” even as its peers JPMorgan Chase & Co. and Citigroup have both announced plans to pause buybacks. UnitedHealth Group Inc.’s second-quarter results were lifted by lower costs of care that portend well for other health insurers but may be a warning sign for hospital companies.

Some of the main moves in markets:

Stocks

  • The S&P 500 rose 1.5% as of 12:29 p.m. New York time
  • The Nasdaq 100 rose 1.3%
  • The Dow Jones Industrial Average rose 1.8%
  • The MSCI World index rose 1.4%

Currencies

  • The Bloomberg Dollar Spot Index fell 0.4%
  • The euro rose 0.6% to $1.0076
  • The British pound rose 0.2% to $1.1849
  • The Japanese yen rose 0.3% to 138.61 per dollar

Bonds

  • The yield on 10-year Treasuries declined four basis points to 2.92%
  • Germany’s 10-year yield declined five basis points to 1.13%
  • Britain’s 10-year yield declined one basis point to 2.09%

Commodities

  • West Texas Intermediate crude rose 2% to $97.70 a barrel
  • Gold futures fell 0.2% to $1,701.90 an ounce
Gallery

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