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Stocks Drop as Robust Data to Keep Fed Aggressive : Markets Wrap

Stocks Drop as Robust Data to Keep Fed Aggressive : Markets Wrap
Company trading price movements on a digital screen. (Photo: Cyril Marcilhacy/Bloomberg)

US stocks sank for a fifth day and a measure of the dollar surged to a record after data showed the American economy remained robust last month even as the Federal Reserve stepped up its inflation battle.

The S&P 500 dropped more than 1% to start September, the two-year Treasury yield topped 3.5% and the dollar rallied on speculation the latest data will force the Fed to raise rates by three-quarters of a percentage point at its meeting later this month. Risk assets had been under pressure over night after China put the megacity of Chengdu under lockdown, delivering a blow to economic growth.

US manufacturing growth steadied in August, while jobless claims came in lower than estimated, adding to a flurry of data this week that show the American economy can likely withstand additional harsh central bank tightening. Investors on Friday will receive the last reading on unemployment before the Fed’s next meeting. August inflation data is due Sept. 13.

“The market got ahead of itself thinking that the Fed was going to be able to cut interest rates next year because of some of the softening in inflation data,” said Megan Horneman, chief investment officer at Verdence Capital Advisors. Central bank officials quashing hopes of a dovish pivot drove a “pretty big shift in expectations for interest rates, not this year, per se, but really next year,” she said.

Stocks are also entering a month that is often poor for returns, following losses in August. The S&P 500 has averaged declines of 0.6% and 0.7% for August and September, respectively, over the past 25 years.

“Right now you have to be patient,” Horneman said. “I wouldn’t try and get in the middle of this kind of reset and re-pricing we’ve seen. The markets can move pretty violently.”

Chengdu’s lockdown continues to ripple through the economy. Factory slowdowns in Europe and Asia also reflect dwindling demand.

Investors are also assessing political risks as Russia’s invasion of Ukraine continues and tensions in Taiwan mount, with the latter shooting down a civilian drone after weeks of complaints about incursions by unmanned aerial vehicles from China.

Russia is considering a plan to buy as much as $70 billion in yuan and other “friendly” currencies this year to slow the ruble’s surge, before shifting to a longer-term strategy of selling its holdings of the Chinese currency to fund investment.

“The Fed effect is now melding with other global factors such as China’s growth slowdown and Europe’s stagflation to create a more fraught global macro environment with higher rates and lower growth,” said Alvin Tan, strategist at RBC Capital Markets in Singapore. “It is this combination of hawkish central banks led by the Fed, China’s slowdown and Europe’s stagflation that is now driving volatility across global markets.”

Read more about global markets:

Here are some key events to watch this week:

  • ECB Governing Council members due to speak at event Tuesday through Sept. 2
  • US nonfarm payrolls, Friday
  • UK leadership ballot closes Friday. Winner announced Sept. 5

Will Chinese sovereign bonds outperform Treasuries? China is the theme of this week’s MLIV Pulse survey. Click here to participate anonymously.

Some of the main moves in markets:

Stocks

  • The S&P 500 fell 1.1% as of 11:29 a.m. New York time
  • The Nasdaq 100 fell 2%
  • The Dow Jones Industrial Average fell 0.5%
  • The Stoxx Europe 600 fell 1.7%
  • The MSCI World index fell 0.6%

Currencies

  • The Bloomberg Dollar Spot Index rose 0.7%
  • The euro fell 1.2% to $0.9937
  • The British pound fell 0.8% to $1.1532
  • The Japanese yen fell 0.7% to 139.95 per dollar

Bonds

  • The yield on 10-year Treasuries advanced seven basis points to 3.26%
  • Germany’s 10-year yield advanced three basis points to 1.57%
  • Britain’s 10-year yield advanced nine basis points to 2.89%

Commodities

  • West Texas Intermediate crude fell 2.8% to $87.02 a barrel
  • Gold futures fell 1.1% to $1,707.70 an ounce
Gallery

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