Tag Archives: SPX

Business

Can the Fed tame inflation without further crushing the stock market? What’s next for investors.

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The Federal Reserve isn’t trying to slam the stock market as it rapidly raises interest rates in its bid to slow inflation still running red hot — but investors need to be prepared for more pain and volatility because policy makers aren’t going to be cowed by a deepening selloff, investors and strategists said.

“I don’t think they’re necessarily trying to drive inflation down by destroying stock prices or bond prices, but it is having that effect.” said Tim Courtney, chief investment officer at Exencial Wealth Advisors, in an interview.

U.S. stocks fell sharply in the past week after hopes for a pronounced cooling in inflation were dashed by a hotter-than-expected August inflation reading. The data cemented expectations among fed-funds futures traders for a rate hike of at least 75 basis points when the Fed concludes its policy meeting on Sept. 21, with some traders and analysts looking for an increase of 100 basis points, or a full percentage point.

Preview: The Fed is ready to tell us how much ‘pain’ the economy will suffer. It still won’t hint at recession though.

The Dow Jones Industrial Average
DJIA,
-0.45%
logged a 4.1% weekly fall, while the S&P 500
SPX,
-0.72%
dropped 4.8% and the Nasdaq Composite
COMP,
-0.90%
suffered a 5.5% decline. The S&P 500 ended Friday below the 3,900 level viewed as an important area of technical support, with some chart watchers eyeing the potential for a test of the large-cap benchmark’s 2022 low at 3,666.77 set on June 16.

See: Stock-market bears seen keeping upper hand as S&P 500 drops below 3,900

A profit warning from global shipping giant and economic bellwether FedEx Corp.
FDX,
-21.40%
further stoked recession fears, contributing to stock-market losses on Friday.

Read: Why FedEx’s stock plunge is so bad for the whole stock market

Treasurys also fell, with yield on the 2-year Treasury note
TMUBMUSD02Y,
3.867%
soaring to a nearly 15-year high above 3.85% on expectations the Fed will continue pushing rates higher in coming months. Yields rise as prices fall.

Investors are operating in an environment where the central bank’s need to rein in stubborn inflation is widely seen having eliminated the notion of a figurative “Fed put” on the stock market.

The concept of a Fed put has been around since at least the October 1987 stock-market crash prompted the Alan Greenspan-led central bank to lower interest rates. An actual put option is a financial derivative that gives the holder the right but not the obligation to sell the underlying asset at a set level, known as the strike price, serving as an insurance policy against a market decline.

Some economists and analysts have even suggested the Fed should welcome or even aim for market losses, which could serve to tighten financial conditions as investors scale back spending.

Related: Do higher stock prices make it harder for the Fed to fight inflation? The short answer is ‘yes’

William Dudley, the former president of the New York Fed, argued earlier this year that the central bank won’t get a handle on inflation that’s running near a 40-year high unless they make investors suffer. “It’s hard to know how much the Federal Reserve will need to do to get inflation under control,” wrote Dudley in a Bloomberg column in April. “But one thing is certain: to be effective, it’ll have to inflict more losses on stock and bond investors than it has so far.”

Some market participants aren’t convinced. Aoifinn Devitt, chief investment officer at Moneta, said the Fed likely sees stock-market volatility as a byproduct of its efforts to tighten monetary policy, not an objective.

“They recognize that stocks can be collateral damage in a tightening cycle,” but that doesn’t mean that stocks “have to collapse,” Devitt said.

The Fed, however, is prepared to tolerate seeing markets decline and the economy slow and even tip into recession as it focuses on taming inflation, she said.

Recent: Fed’s Powell says bringing down inflation will cause pain to households and businesses in Jackson Hole speech

The Federal Reserve held the fed funds target rate at a range of 0% to 0.25% between 2008 and 2015, as it dealt with the financial crisis and its aftermath. The Fed also cut rates to near zero again in March 2020 in response to the COVID-19 pandemic. With a rock-bottom interest rate, the Dow
DJIA,
-0.45%
skyrocketed over 40%, while the large-cap index S&P 500
SPX,
-0.72%
jumped over 60% between March 2020 and December 2021, according to Dow Jones Market Data.

Investors got used to “the tailwind for over a decade with falling interest rates” while looking for the Fed to step in with its “put” should the going get rocky, said Courtney at Exencial Wealth Advisors.

“I think (now) the Fed message is ‘you’re not gonna get this tailwind anymore’,” Courtney told MarketWatch on Thursday. “I think markets can grow, but they’re gonna have to grow on their own because the markets are like a greenhouse where the temperatures have to be kept at a certain level all day and all night, and I think that’s the message that markets can and should grow on their own without the greenhouse effect.”

See: Opinion: The stock market’s trend is relentlessly bearish, especially after this week’s big daily declines

Meanwhile, the Fed’s aggressive stance means investors should be prepared for what may be a “few more daily stabs downward” that could eventually prove to be a “final big flush,” said Liz Young, head of investment strategy at SoFi, in a Thursday note.

“This may sound odd, but if that happens swiftly, meaning within the next couple months, that actually becomes the bull case in my view,” she said. “It could be a quick and painful drop, resulting in a renewed move higher later in the year that’s more durable, as inflation falls more notably.”

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Business

Google randomly sent him $250K. This is what happened next.

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A self-described hacker was randomly paid almost $250,000 by Google. He was baffled by the payment.

On Tuesday, Sam Curry tweeted about the mysterious payment from Alphabet Inc.’s
GOOGL,
-0.11%
Google. “It’s been a little over 3 weeks since Google randomly sent me $249,999 and I still haven’t heard anything on the support ticket. Is there any way we could get in touch @Google?” he wrote.

“It’s OK if you don’t want it back…,” he quipped.

Curry describes himself as a hacker and a bug bounty hunter in his Twitter bio. He works as a staff security engineer at Yuga Labs, the crypto and non-fungible token (NFT) specialist that created the famous Bored Ape Yacht Club NFT project.

Opinion: Don’t dismiss Bored Apes — NFTs could turn out to be a practical platform for sales and smart contracts

NPR reports that Curry sometimes does bug bounty work for Google and other companies.

“Google did indeed contact me and I’m going to head into the bank today to pay it back,” Curry told MarketWatch on Friday.

“Our team recently made a payment to the wrong party as the result of human error,” a spokesperson for Google told MarketWatch. “We appreciate that it was quickly communicated to us by the impacted partner, and we are working to correct it.”

Bug bounties are paid out by companies and other organizations when someone discovers a vulnerability in their systems and reports the vulnerability, or “bug,” back to them. Last year, for example, the Department of Homeland Security launched its “Hack DHS” program, which invited vetted cybersecurity researchers and ethical hackers to identify potential vulnerabilities in certain DHS external systems.

In April 2022 the Department reported that more than 450 vetted researchers identified 122 vulnerabilities, 27 of which were determined to be critical. DHS awarded a total of $125,600 in bounties, it said.

Alphabet shares were down 0.9% before the market open on Friday. The stock has dropped 29.0% year to date through Thursday, compared with the S&P 500 index
SPX,
-0.72%,
which has dropped 18.2%.

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Business

Why ‘quantitative tightening’ is the wild card that could sink the stock market

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Quantitative monetary easing is credited for juicing stock market returns and boosting other speculative asset values by flooding markets with liquidity as the Federal Reserve snapped up trillions of dollars in bonds during both the 2008 financial crisis and the 2020 coronavirus pandemic in particular. Investors and policy makers may be underestimating what happens as the tide goes out.

“I don’t know if the Fed or anybody else truly understands the impact of QT just yet,” said Aidan Garrib, head of global macro strategy and research at Montreal-based PGM Global, in a phone interview.

The Fed, in fact, began slowly shrinking its balance sheet — a process known as quantitative tightening, or QT — earlier this year. Now it’s accelerating the process, as planned, and it’s making some market watchers nervous.

A lack of historical experience around the process is raising the uncertainty level. Meanwhile, research that increasingly credits quantitative easing, or QE, with giving asset prices a lift logically points to the potential for QT to do the opposite.

Since 2010, QE has explained about 50% of the movement in market price-to-earnings multiples, said Savita Subramanian, equity and quant strategist at Bank of America, in an Aug. 15 research note (see chart below).


BofA U.S. Equity & Quant Strategy

“Based on the strong linear relationship between QE and S&P 500 returns from 2010 to 2019, QT through 2023 would translate into a 7 percentage-point drop in the S&P 500 from here,” she wrote.

Archive: How much of the stock market’s rise is due to QE? Here’s an estimate

In quantitative easing, a central bank creates credit that’s used to buy securities on the open market. Purchases of long-dated bonds are intended to drive down yields, which is seen enhancing appetite for risky assets as investors look elsewhere for higher returns. QE creates new reserves on bank balance sheets. The added cushion gives banks, which must hold reserves in line with regulations, more room to lend or to finance trading activity by hedge funds and other financial market participants, further enhancing market liquidity.

The way to think about the relationship between QE and equities is to note that as central banks undertake QE, it raises forward earnings expectations. That, in turn, lowers the equity risk premium, which is the extra return investors demand to hold risky equities over safe Treasurys, noted PGM Global’s Garrib. Investors are willing to venture further out on the risk curve, he said, which explains the surge in earnings-free “dream stocks” and other highly speculative assets amid the QE flood as the economy and stock market recovered from the pandemic in 2021.

However, with the economy recovering and inflation rising the Fed began shrinking its balance sheet in June, and is doubling the pace in September to its maximum rate of $95 billion per month. This will be accomplished by letting $60 billion of Treasurys and $35 billion of mortgage backed securities roll off the balance sheet without reinvestment. At that pace, the balance sheet could shrink by $1 trillion in a year.

The unwinding of the Fed’s balance sheet that began in 2017 after the economy had long recovered from the 2008-2009 crisis was supposed to be as exciting as “watching paint dry,” then-Federal Reserve Chairwoman Janet Yellen said at the time. It was a ho-hum affair until the fall of 2019, when the Fed had to inject cash into malfunctioning money markets. QE then resumed in 2020 in response to the COVID-19 pandemic.

More economists and analysts have been ringing alarm bells over the possibility of a repeat of the 2019 liquidity crunch.

“If the past repeats, the shrinking of the central bank’s balance sheet is not likely to be an entirely benign process and will require careful monitoring of the banking sector’s on-and off-balance sheet demandable liabilities,” warned Raghuram Rajan, former governor of the Reserve Bank of India and former chief economist at the International Monetary Fund, and other researchers in a paper presented at the Kansas City Fed’s annual symposium in Jackson Hole, Wyoming, last month.

Hedge-fund giant Bridgewater Associates in June warned that QT was contributing to a “liquidity hole” in the bond market.

The slow pace of the wind-down so far and the composition of the balance-sheet reduction have muted the effect of QT so far, but that’s set to change, Garrib said.

He noted that QT is usually described in the context of the asset side of the Fed’s balance sheet, but it’s the liability side that matters to financial markets. And so far, reductions in Fed liabilities have been concentrated in the Treasury General Account, or TGA, which effectively serves as the government’s checking account.

That’s actually served to improve market liquidity he explained, as it means the government has been spending money to pay for goods and services. It won’t last.

The Treasury plans to increase debt issuance in coming months, which will boost the size of the TGA. The Fed will actively redeem T-bills when coupon maturities aren’t sufficient to meet their monthly balance sheet reductions as part of QT, Garrib said.

The Treasury will be effectively taking money out of economy and putting it into the government’s checking account — a net drag — as it issues more debt. That will put more pressure on the private sector to absorb those Treasurys, which means less money to put into other assets, he said.

The worry for stock-market investors is that high inflation means the Fed won’t have the ability to pivot on a dime as it did during past periods of market stress, said Garrib, who argued that the tightening by the Fed and other major central banks could set up the stock market for a test of the June lows in a drop that could go “significantly below” those levels.

The main takeaway, he said, is “don’t fight the Fed on the way up and don’t fight the Fed on the way down.”

Stocks ended higher on Friday, with the Dow Jones Industrial Average
DJIA,
+1.19%,
S&P 500
SPX,
+1.53%
and Nasdaq Composite
COMP,
+2.11%
snapping a three-week run of weekly losses.

The highlight of the week ahead will likely come on Tuesday, with the release of the August consumer-price index, which will be parsed for signs inflation is heading back down.

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Business

Fed’s Powell sparked a 1,000-point rout in the Dow. Here’s what investors should do next.

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Now might be the time to consider hiding out in short-dated Treasurys or corporate bonds and other defensive parts of the stock market.

On Friday, Federal Reserve Chairman Jerome Powell talked of a willingness to inflict “some pain” on households and businesses in an unusually blunt Jackson Hole speech that hinted at a 1970s-style inflation debacle, unless the central bank can rein in sizzling price gains running near the highest levels in four decades.

Read: Fed’s Powell says bringing down inflation will cause pain to households and businesses in Jackson Hole speech

Powell’s strident stance had strategists searching for the best possible plays that investors can make, which may include government notes, energy and financial stocks, and emerging-market assets.

The Fed chair’s willingness to essentially break parts of the U.S. economy to curb inflation “obviously benefits the front end” of the Treasury market, where rates are moving higher in conjunction with expectations for Fed rate hikes, said Daniel Tenengauzer, head of markets strategy for BNY Mellon in New York. 

To his point, the 2-year Treasury yield
TMUBMUSD02Y,
3.384%
hit its highest level since June 14 on Friday, at 3.391%, after Powell’s speech — reaching a level last seen when the S&P 500 officially entered a bear market.

Investors might consider making a play for the front end of credit markets, like commercial paper, and leveraged loans, which are floating-rate instruments — all of which take advantage of the “most clear direction in markets right now,” Tenengauzer said via phone. He’s also seeing demand for Latin American currencies and equities, considering central banks in that region are further along in their rate-hiking cycles than the Fed is and inflation is already starting to decline in countries like Brazil. 

A Fed battle cry

Powell’s speech was a moment reminiscent of Mario Draghi’s “do whatever it takes” battle cry a decade ago, when he pledged as then-president of the European Central Bank to preserve the euro during a full-blown sovereign-debt crisis in his region.

Attention now turns to next Friday’s nonfarm payroll report for August, which economists expect will show a 325,000 job gain following July’s unexpectedly red-hot 528,000 reading. Any nonfarm payrolls gain above 250,000 in August would add to the Fed’s case for further aggressive rate hikes, and even a 150,000 gain would be enough to generally keep rate hikes going, economists and investors said.

The labor market remains “out of balance” — in Powell’s words — with demand for workers outstripping supply. August’s jobs data will offer a peek into just how off kilter it still might be, which would reinforce the Fed’s No. 1 goal of bringing inflation down to 2%. Meanwhile, continued rate hikes risk tipping the U.S. economy into a recession and weakening the labor market, while narrowing the amount of time Fed officials may have to act forcefully, some say.

“It’s a really delicate balance and they’re operating in a window now because the labor market is strong and it’s pretty clear they should push as hard as they can” when it comes to higher interest rates, said Brendan Murphy, the North American head of global fixed income for Insight Investment, which manages $881 billion in assets.

“All else equal, a strong jobs market means they have to push harder, given the context of higher wages,” Murphy said via phone. “If the labor market starts to deteriorate, then the two parts of the Fed’s mandate will be at odds and it will be harder to hike aggressively if the labor market is weakening.”

Insight Investment has been underweight duration in bonds within the U.S. and other developed markets for some time, he said. The London-based firm also is taking on less interest-rate exposure, staying in yield-curve flattener trades, and selectively going overweight in European inflation markets, particularly Germany’s.

For Ben Emons, managing director of global macro strategy at Medley Global Advisors in New York, the best combination of plays that investors could take in response to Powell’s Jackson Hole speech are “to be offense in materials/energy/banks/select EM and defense in dividends/low vol stocks (think healthcare)/long the dollar.”

‘Tentative signs’

The depth of the Fed’s commitment to stand by its inflation-fighting campaign sank in on Friday: Dow industrials
DJIA,
-3.03%
sold off by 1,008.38 points for its largest decline since May, leaving it, along with the S&P 500
SPX,
-3.37%
and Nasdaq Composite
COMP,
-3.94%,
nursing weekly losses. The Treasury curve inverted more deeply, to as little as minus 41.4 basis points, as the 2-year yield rose to almost 3.4% and the 10-year rate
TMUBMUSD10Y,
3.042%
was little changed at 3.03%.

For now, both the inflation and employment sides of the Fed’s dual mandate “point to tighter policy,” according to senior U.S. economist Michael Pearce of Capital Economics. However, there are “tentative signs” the U.S. labor market is beginning to weaken, such as an increase in jobless claims relative to three and four months ago, he wrote in an email to MarketWatch. Policy makers “want to see the labor market weakening to help bring wage growth down to rates more consistent with the 2% inflation target, but not so much that it generates a deep recession.”

With an unemployment rate of 3.5% as of July, one of the lowest levels since the late 1960s, Fed officials still appear to have plenty of scope to push forward with their inflation battle. Indeed, Powell said the central bank’s “overarching” goal is to bring inflation back to its 2% target and that policy makers would stand by that task until it’s done. In addition, he said they’ll use their tools “forcefully” to bring that about, and the failure to restore price stability would involve greater pain.

Front-loading hikes

The idea that it be might be “wise” for policy makers to front-load rate hikes while they still can seems to be what’s motivating Fed officials like Neel Kashkari of the Minneapolis Fed and James Bullard of the St. Louis Fed, according to Derek Tang, an economist at Monetary Policy Analytics in Washington. 

On Thursday, Bullard told CNBC that, with the labor market strong, “it seems like a good time to get to the right neighborhood for the funds rate.” Kashkari, a former dove who’s now one of the Fed’s top hawks, said two days earlier that the central bank needs to push ahead with tighter policy until inflation is clearly moving down.

Luke Tilley, the Philadelphia-based chief economist for Wilmington Trust Investment Advisors, said the next nonfarm payroll report could come in either “high or low” and that still wouldn’t be the main factor behind Fed officials’ decision on the magnitude of rate hikes.

What really matters for the Fed is whether the labor market shows signs of loosening from its current tight conditions, Tilley said via phone. “The Fed would be perfectly fine with strong job growth as long as it means less pressure on wages, and what they want is to not have such a mismatch between supply and demand. Hiring is not the big deal, it’s the fact that there are so many job openings available for people. What they really want to see is some mix of weaker labor demand, a decline in job openings, stronger labor-force participation, and less pressure on wages.”

The week ahead

Friday’s August jobs report is the data highlight of the coming week. There are no major data releases on Monday. Tuesday brings the S&P Case-Shiller home price index for June, the August consumer confidence index, July data on job openings plus quits, and a speech by New York Fed President John Williams.

On Wednesday, Loretta Mester of the Cleveland Fed and Raphael Bostic of the Atlanta Fed speak; the Chicago manufacturing purchasing managers index is also released. The next day, weekly initial jobless claims, the S&P Global U.S. manufacturing PMI, the ISM manufacturing index, and July construction spending data are released, along with more remarks by Bostic. On Friday, July factory orders and a revision to core capital equipment orders are released.

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Technology

Apple plans to unveil iPhone 14 at Sept. 7 event: report

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Apple Inc. is expected to unveil its latest line of iPhones and smartwatches on Sept. 7, according to a new report.

Bloomberg News reported Wednesday that the tech giant will update its flagship smartphones amid a busy fall product rollout that includes three new Apple Watch models and multiple new versions of Macs and iPads by year’s end.

But the iPhone 14 launch is by far the biggest deal for Apple. Last quarter, Apple reported $40.67 billion in revenue from iPhone sales, up from $39.57 billion a year prior, and roughly half of the company’s total revenue. That beat analysts’ expectations, defying global supply-chain problems and rising inflation.

The iPhone 14 will reportedly feature a better camera but otherwise fairly minor technological upgrades, and will add a version with a 6.7-inch screen while eliminating the 5.4-inch “mini” version.

Analysts are bullish on Apple’s outlook. Credit Suisse’s Shannon Cross on Wednesday named Apple of of her “top picks,” raising her rating on the stock to outperform from neutral, with a $201 price target, while Wedbush’s Dan Ives told CNBC that demand for Apple products will likely remain strong next year.

Apple shares
AAPL,
+0.88%
closed slightly higher Wednesday, at $174.55, and are down about 2% year to date, following a 24% rally over the past three months. In comparison, the S&P 500
SPX,
-0.72%
is down 10% in 2022, after a 9% gain over the past three months.

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Business

Why stock market bulls are cheering the S&P 500’s close above 4,231

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The S&P 500 index on Friday finished above a chart level that delivered a dose of encouragement to stock-market bulls arguing that the U.S. bear-market bottom is in, though technical analysts warned that it might not be a signal to go all in on equities.

The S&P 500
SPX,
+1.73%
on Friday rose 1.7% to close at 4,280.15. The finish above 4,231 would mean the large-cap benchmark has recovered — or retraced — more than 50% of its fall from a Jan. 3 record finish at 4796.56.

“Since 1950 there has never been a bear market rally that exceeded the 50% retracement and then gone on to make new cycle lows,” said Jonathan Krinsky, chief market technician at BTIG, in a note earlier this month.

Stocks rose across the board Friday, with the S&P 500 booking a fourth straight weekly gain. The Dow Jones Industrial Average
DJIA,
+1.27%
advanced more than 420 points, or 1.3%, on Friday and the Nasdaq Composite
COMP,
+2.09%
rose 2.1%. The S&P 500 attempted to complete the retracement in Thursday’s session, when it traded as high as 4,257.91, but gave up gains to end at 4,207.27.

Krinsky, in a Thursday update, had noted that an intraday breach of the level doesn’t cut it, but had cautioned that a close above 4,231 would still leave him cautious about the near-term outlook.

“Because the retracement is based on a closing basis, we would want to see a close above 4,231 to trigger that signal. Whether or not that happens, however, the tactical risk/reward looks poor to us here,” he wrote.

What’s so special about a 50% retracement? Many technical analysts pay attention to what’s known as the Fibonacci ratio, attributed to a 13th century Italian mathematician known as Leonardo “Fibonacci” of Pisa. It’s based on a sequence of whole numbers in which the sum of two adjacent numbers equals the next highest number (0,1,1,2,3,5,8,13, 21 …).

If a number in the sequence is divided by the next number, for example 8 divided by 13, the result is near 0.618, a ratio that’s been dubbed the Golden Mean due to its prevalence in nature in everything from seashells to ocean waves to proportions of the human body. Back on Wall Street, technical analysts see key retracement targets for a rally from a significant low to a significant peak at 38.2%, 50% and 61.8%, while retracements of 23.6% and 76.4% are seen as secondary targets.

The push above the 50% retracement level during Thursday’s recession may have contributed to a round of selling itself, said Jeff deGraaf, founder of Renaissance Macro Research, in a Friday note.

He observed that the retracement corresponded to a 65-day high for the S&P 500, offering another indication of an improving trend in a bear market as it represents the highest level of the last rolling quarter. A 65-day high is often seen as a default signal for commodity trading advisers, not just in the S&P 500 but in commodity, bond and forex markets as well.

“That level coincidentally corresponded with the 50% retracement level of the bear market,” he wrote. “In essence, it forced the hand of one group to cover shorts (CTAs) while simultaneously giving another group (Fibonacci followers) an excuse to sell” on Thursday.

Krinsky, meanwhile, cautioned that previous 50% retracements in 1974, 2004 and 2009 all saw decent shakeouts shortly after clearing that threshold.

“Further, as the market has cheered ‘peak inflation’, we are now seeing a quiet resurgence in many commodities, and bonds continue to weaken,” he wrote Thursday.

See: Stock-market euphoria meets bond-market pessimism as ‘strange week’ comes to end

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World

Why China-Taiwan tensions moved to the forefront of financial market worries

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It’s an island off the coast of China, with a land area comparable to Maryland and Delaware combined. Its population is about 1 million higher than that of Florida.

Often overlooked in world headlines, Taiwan is grabbing the financial market’s attention as the biggest macro risk of the day, prompting many traders and investors to turn away from concerns about recession, inflation, central banks and Russia’s war on Ukraine. The focus is on U.S. Speaker Nancy Pelosi’s visit to Taiwan, which is triggering fears of retaliation by the island’s giant neighbor China.

Earlier on Tuesday, global stocks sold off on the geopolitical tension, while investors scrambled to the safety of U.S. Treasurys and traders took a second look at their positions across assets. After Pelosi’s plane landed safely in Taipei, Taiwan’s capital, market sentiment seemed to improve in the stock market, with the S&P 500 index and Nasdaq Composite popping higher.

“Macro investors have been counting on China’s reopening to stabilize positions,” said Jim Vogel, a Memphis-based executive vice president and interest-rate strategist at FHN Financial. They’ve pared allocations to equities and have been counting on floors for commodity prices, as well as limits to downside price action in fixed income.

Now, however, relying on China “as an international growth driver is unreliable,” Vogel wrote in a note Tuesday. What’s more, China’s intentions toward Taiwan “have been obvious and threatening for years,” and the narrative between the two “will not go away for years.”

Pelosi is the highest-ranking American politician to visit the island of Taiwan in 25 years, when then-Speaker Newt Gingrich arrived in 1997.

On Tuesday, jitters first emerged in Asian markets, which were “shaky” Tuesday morning amid fears that China’s military jets “could buzz Pelosi’s plane,” said Greg Valliere, chief U.S. policy strategist for AGF Investments. Valliere described the potential for a mistake by either side as “quite serious.”

Chinese President Xi Jinping is seen by intelligence experts as needing a “diversion” from his country’s struggling economy and attempts to recover from “exceptionally harsh” COVID restrictions, according to Valliere. At the same time, China’s president “cannot afford to look weak” as he seeks a third term in office later this year.

Meanwhile, Beijing sees Taiwan as a threat, given the island’s healthy economy and personal freedoms. Taiwan is generally regarded as the most democratic place in East Asia. Pelosi’s visit will have a “major” impact — resulting in further deterioration of relations between the U.S. and China, “with little hope for a reconciliation on trade,” the AGF strategist said.

Frantic traders had been tracking every move of Pelosi’s plane on popular flight trackers, and it was flight-to-safety sentiment that drove bond yields lower earlier on Tuesday, according to Ben Emons, managing director of global macro strategy at Medley Global Advisors in New York. He described the bond market’s moves as being the result of “the Nancy Pelosi kerfuffle.”

According to senior analyst Neil Thomas and others at Eurasia Group, a New York-based consulting firm, “Pelosi’s visit will significantly raise U.S.-China tensions but is unlikely to produce a Chinese reaction that risks conflict.”

Eurasia Group sees “a 25% chance of a major security crisis, such as a prolonged U.S.-China military standoff that threatens further escalation,” they wrote in a note. Still, Beijing could order additional military air and naval exercises,  might sanction the U.S. delegation and freeze bilateral exchanges, and has the potential to consider boycotts and sanctions on Taiwan and U.S. firms, the consultancy said.

On Tuesday, major U.S. stock indexes
DJIA,
-1.09%

SPX,
-0.52%

COMP,
-0.07%
were mixed in late morning trading. Meanwhile, investors sold off government bonds, sending yields higher across the board in a reversal of Tuesday’s earlier bond rally.

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Business

NIO, other China-based EV maker stocks surge after July deliveries jump

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The U.S.-listed shares of NIO Inc.
NIO,
+1.23%
rallied 4.2% in premarket trading Monday, after the China-based electric vehicle maker reported deliveries rose in July from a year ago to mark a third-straight monthly increase. The company said July deliveries increased 26.7% to 10,052 vehicles. That comes after a 60.3% increase in July and a 4.7% rise in May, which followed a 28.6% drop in April due to COVID-related shutdowns. In July, NIO said its deliveries included 7,579 premium sport-utility vehicles (SUVs) and 2,473 premium sedans. Also on Monday, fellow China-based EV makers XPeng Inc.
XPEV,
+0.66%
reported a 43% jump in July deliveries to 11,524 vehicles, to send the stock up 3.9% premarket, and shares of Li Auto Inc.
LI,
-0.27%
climbed 4.2% after the company reported July deliveries that grew 21.3% to 10,422 vehicles. Over the past three months, NIO’s stock has hiked up 18.1%, XPeng shares have slipped 0.7% and Li Auto’s stock has soared 46.4%, while the S&P 500
SPX,
+1.42%
has inched lower by less than 0.1%.

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Business

U.S. stocks push higher as Powell sees path back to 2% inflation while sustaining strong labor market

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U.S. stock indexes pushed higher after a wobbly start Wednesday, leaving Wall Street potentially on to gain ground after back-to-back losses, as investors tune in to remarks by central bankers while fretting that soaring inflation is damaging the world’s biggest economy.

How are stock indexes trading?
  • The Dow Jones Industrial Average
    DJIA,
    +0.12%
     was up 196 points, or 0.6%, at 31,143.
  • The S&P 500
    SPX,
    -0.23%
     traded up 15 points, or 0.4%, at 3,836.
  • The Nasdaq Composite
    COMP,
    -0.43%
    gained 42 points, or 0.4%, to 11,223.

On Tuesday, the Dow fell 491.27 points, or 1.6%. The S&P 500 fell 2% and the Nasdaq Composite dropped 3%. All three booked their worst daily percentage declines since June 16, according to Dow Jones Market Data.

What’s driving markets?

Federal Reserve Chair Jerome Powell said Wednesday at a European Central Bank forum on central banking that he sees a path back to 2% inflation while sustaining strong labor market, but warned there was “no guarantee that we can do that.”

Investors were also listening to remarks from European Central Bank President Christine Lagarde, Bank of England Gov. Andrew Bailey and Augustin Carstens, head of Bank for International Settlements, to speak at speak at the same conference.

On U.S. economic data, the first-quarter GDP was revised to show an 1.6% decline, compared with the prior 1.5% drop.

Equities were limping toward the end of a miserable first half of the year. The S&P 500 is down 19.6% so far in 2022, hit by concerns that inflation rates at multidecade highs are badly damaging household sentiment and that the Federal Reserve’s response to surging prices may tip the economy into recession.

Read: What’s next for the stock market after the worst 1st half since 1970? Here’s the history.

On Tuesday, the Conference Board’s consumer-confidence index dropped in June to a 16-month low of 98.7, with consumers’ outlook on the state of the economy at the most cautious in nearly 10 years. The news helped turn early gains for Wall Steet into heavy losses, with the Nasdaq Composite shedding 3%, leaving the tech-heavy index nursing a loss of 28% for the year to date.

“Last week, U.S. equity markets rallied on the back of the arcane logic that a U.S. recession would mean a lower terminal Fed funds rates and thus, was bullish for stocks… That premise was boosted by weak Michigan Consumer Sentiment data,” said Jeffrey Halley, senior market analyst at OANDA, in a note to clients.

See: Wall Street’s favorite stock sector has potential upside of 43% as we enter the second half of 2022

On Tuesday, “even weaker U.S. Conference Board Consumer Confidence data provoked the opposite reaction, with U.S. stocks plummeting,” he added.

Wall Steet’s dive left Asian and European bourses floundering. Hong Kong’s Hang Seng
HSI,
-1.88%
fell 2% and the Nikkei 225
NIK,
-0.91%
in Japan slipped 0.9%. China’s Shanghai Composite
SHCOMP,
-1.40%
shed 1.4% after President Xi Jinping reiterated that the regime’s strict COVID-19 policy was “correct and effective.”

The comments added to worries that supply constraints in China could exacerbate global inflationary pressures. And such concerns were illustrated in Spain on Wednesday, where data showed prices rising by 10.2% in June, their fastest pace in 37 years. Europe’s Stoxx 600
SXXP,
-0.41%
fell 0.8%.

Oil prices crept higher, with WTI crude
CL.1,
+1.61%,
up 1.5% to $113.41 a barrel.

The yield on the U.S. 10-year Treasury note
TMUBMUSD10Y,
3.135%
eased 1.3 basis points to 3.167%.

Companies in focus
  • Shares of Pinterest Inc.
    PINS,
    -2.36%
    rose 0.2% after the social-media company said co-founder Ben Silbermann is stepping down as chief executive and is being replaced by an e-commerce executive from Google.
  • Bed Bath & Beyond Inc.
    BBBY,
    -22.21%
    shares fell 18.7% after it announced disappointing fiscal first-quarter results and the ouster of its chief executive, Mark Tritton.
  • General Mills Inc.
    GIS,
    +5.31%
    shares rose 4.7% after beating quarterly expectations. The company posted fourth-quarter net income of $822.8 million, or $1.35 per share, nearly double $416.8 million, or 68 cents per share, last year. Adjusted EPS of $1.12, ahead of the FactSet consensus for $1.01 per share. 
Other assets
  • The ICE U.S. Dollar Index
    DXY,
    +0.30%
     edged down 0.01%.
  • Bitcoin
    BTCUSD,
    -1.04%
     fell 4.6% to trade near $20,120.
  • August gold futures
    GCQ22,
    -0.12%
    gained $6.30, or 0.4%, to settle at $1,827.90 an ounce.

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Business

U.S. stocks turn lower after weak consumer-confidence reading

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U.S. stocks gave up early gains to turn lower Tuesday after a consumer-confidence reading came in weaker than expected.

What’s happening
  • The Dow Jones Industrial Average
    DJIA,
    -0.69%
    was down 185 points, or 0.6%, at 31,253.
  • The S&P 500
    SPX,
    -1.03%
    fell 38 points, or 1%, to 3,862.
  • The Nasdaq Composite
    COMP,
    -1.79%
    dropped 202 points, or 1.8%, to 11,323.

On Monday, major indexes drifted to a modestly lower close. The S&P 500, which has slid into a bear market, is down 18% year to date,

What’s driving markets

The Conference Board’s consumer-confidence index dropped in June to a 16-month low of 98.7, as Americans grew more worried about high gas and food prices and the health of the economy. Economists polled by The Wall Street Journal had forecast the index to drop to 100 from a revised 103.2 in May.

“The persistent weakness in confidence surveys suggests a recessionary environment can become self-fulfilling,” said John Lynch, chief investment officer for Comerica Wealth Management, in emailed comments.

“While cash on household balance sheets and two job openings for every job seeker are supportive of economic activity, inflation has pressured sentiment and can weigh on consumption and investment decisions,” Lynch said. “For equity investors, this has been reflected in the persistent leadership of defensives relative to cyclicals in the first half of the year.”

Global equities, particularly travel stocks, got a lift early Tuesday, with analysts tying support to moves by the Chinese government, which said it would shorten the quarantine time for international travelers and those who have come into close contact with COVID-19 patients to 10 days from 21 days.

Beijing will also loosen its testing requirements for people in quarantine.

Also, six of the biggest U.S. banks said they have enough capital to either maintain or hike their dividends to shareholders after setting enough aside to handle the most extreme economic conditions expected in the coming year.

Wells Fargo & Co.
WFC,
+0.92%
and Goldman Sachs Group Inc.
GS,
+0.41%
both increased their payouts by 20%, while Morgan Stanley
MS,
+2.03%
delivered an 11% rise. Bank of America Corp.
BAC,
+0.79%
increased its dividend by 5%, while Citigroup Inc.
C,
-0.83%
and JPMorgan Chase & Co.
JPM,
+0.38%
held their dividend flat.

Need to Know: Oaktree’s Howard Marks is finding bargains. ‘I am starting to behave aggressively,’ he says

U.S. stocks were weighed down on Monday after a rise in bond yields. Analysts had been anticipating that month and quarter end rebalancing of portfolios would be supportive of stocks this week, though doubts over the durability of the bounce off recent lows remain.

“It is difficult to draw any concrete conclusions so close to quarter end, when rebalancing flows are muddying the waters,” said Marios Hadjikyriacos, senior investment analyst at XM.

The yield on the 10-year Treasury note BX:TMUBMUSD10Y was up 1 basis point at 3.205%. Yields and debt prices move opposite each other.

New York Fed President John Williams, in a television interview, said he expected the U.S. economy would see a slowdown but not a recession as the central bank aggressively tightens monetary policy in an effort to rein in inflation. Williams said he expected policy makers to debate whether to hike rates by another 50 or 75 basis points when they meet in July, after delivering a 75 basis point increase this month — the largest since 1994.

Data showed the U.S. trade deficit in goods narrowed by 2.2% in May to $104.3 billion.

The S&P CoreLogic Case-Shiller 20-city index posted a 21.2% year-over-year gain in April, up slightly from 21.1% in the previous month. In April, the 20-month index rose a seasonally adjusted 2.3%. A separate report from the Federal Housing Finance Agency showed a 1.6% monthly gain. And over the last year, the FHFA index was up 18.8%.

Companies in focus
  • Nike Inc. NKE shares fell 5.2% after the apparel maker beat earnings estimates but was cautious on margins and on China in particular. But Chinese stocks advanced after a loosening of quarantine requirements in the world’s second-largest economy.
  • JetBlue Airways Corp.
    JBLU,
    +0.63%
    once again raised its offer for discount carrier Spirit Airways Inc.
    SAVE,
    +2.13%
    as it attempts to outbid rival Frontier Group Holdings Inc.
    ULCC,
    +2.99%.
    JetBlue shares rose 0.5%, Spirit shares gained 1.4% and Frontier shares were up 2.2% amid a positive tone across the airline sector. The popular U.S. Global Jets ETF
    JETS,
    +1.10%
    rose 1.6%.
Other assets
  • The ICE U.S. Dollar Index
    DXY,
    +0.47%,
    a measure of the currency against a basket of six major rivals, rose 0.5%.
  • Bitcoin
    BTCUSD,
    -1.03%
    was down 0.6% nea5 $20,600.
  • Oil futures rose, with the U.S. benchmark
    CL.1,
    +1.92%
    up 1.1% near $111 a barrel. Gold futures
    GC00,
    -0.15%
    were off 0.1% near $1,822 an ounce.
  • The Stoxx Europe 600
    SXXP,
    +0.27%
    rose 0.7%, while London’s FTSE 100
    UKX,
    +0.90%
    advanced 1.3%.
  • The Shanghai Composite
    SHCOMP,
    +0.89%
    and Hong Kong’s Hang Seng Index
    HSI,
    +0.85%
    each ended 0.9% higher, while Japan’s Nikkei 225
    NIK,
    +0.66%
    rose 0.7%.

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