December 4, 2022

The Dow Jones Industrial Average ended a bear market on Monday for the first time in more than two years and the S&P 500 fell below its June low as investors fret over the combination of interest rate, currency and economic risks.

What happened

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The stock fell sharply last week, with the Dow down 4% and ending Friday at its lowest level since November 2020. The S&P 500 fell nearly 4.7% and the Nasdaq Composite dropped 5.1% last week.

did the market go

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Stocks came under pressure on Monday on concerns about rising borrowing costs, while the rising dollar continued to wreak havoc around the world.

ICE US Dollar Index DXY,
+0.82%
Started the week above 114, its highest level since 2002. 10-Year Treasury TMUBMUSD10Y,
3.919%
The yield, which started the year around 1.6%, rose to 3.878% on Monday – its highest level since April 2010 – with 30-year rates all either near or above 4% through six months. gone.

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Meanwhile, all three major US stock indexes added to this year’s double-digit losses. The benchmark S&P 500, which is down 23% this year, dropped 4.7% last week after the Federal Reserve insisted it would continue to aggressively raise interest rates to keep inflation near a 40-year high.

“This is a very dangerous time for markets across the board,” said Gregory Faranello, head of US rates at Amerivate Securities in New York. “Financial conditions are tightening very rapidly – ​​be it the dollar strengthening, credit spreads or equities. Real interest rates have been moving extremely aggressively over the past few weeks, which will ultimately have an economic impact.”

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“Liquidity is drying up pretty fast here too,” Faranello said via phone.

Morgan Stanley’s Wilson warns the first thing the Fed will sabotage financial markets with higher rates, the BMO says, and a rise in the US dollar is creating a ‘volatile situation’ for the stock market.

Globally, many central banks are becoming more aggressive at a time when many economies, particularly in the US and Europe, are weakening, said Tom Graff, head of investment for Facet Wealth in Baltimore, which is a $ Manages more than 1 billion. “And we may only be close to the beginning of understanding what this economic downturn will mean,” he said.

Adding to the general market anger are sharp movements in currencies and fixed income in countries where concerns about fiscal illiquidity are rising.

In Asian trading, British Pound GBPUSD,
+0.01%
The greenback hit a record low of less than $1.04 versus a record low of less than $1.04 after investors reacted negatively to last week’s debt-funded tax-slashing budget. It got fixed later, but 10 years old gilt TMBMKGB-10Y,
4.281%
The yield rose 45 basis points to 4.282%. Italian 10-Year Government Bond TMBMKIT-10Y,
4.552%
Yields jumped to more than a nearly 10-year peak of 4.5% after a far-right coalition won the country’s election.

Bailey: Bank of England ‘won’t hesitate to change interest rates as necessary’ to bring inflation down to 2%

A dollar that is now trading at a 20-year high, as well as a British pound that has fallen to a record low against the dollar, are all contributing to concerns in financial markets, Graf said on Monday via phone. Said to.

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“Why does currency volatility in the UK matter more than it is in the US? It is contributing to the risk-off sentiment. Currencies have far-reaching effects and there is concern that there could be a crash,” in which something breaks out in the financial markets. That creates a more severe economic downturn, Graf said. “A stronger dollar has a direct impact on US earnings,” and a UK currency that has fallen as much in a matter of two days “does not normally occur in developed markets.”

However, Jonathan Krinsky, chief market technician at BTIG, wondered whether the S&P 500’s SPX,
-1.03%
A return to its June low should attract investors. The good news is that “in the near term, we are much closer to a tradable bottom than 3,900,” Krinsky wrote in a note.

Technical factors may also favor stocks in the short term. Krinsky notes that a 200-week average can provide 3,585 a floor.

related: Stock market ‘on peak of critical testing’: RBC says watch S&P 500 at this level if 2022 gives way lower

Meanwhile, investors heard from several Federal Reserve officials on Monday. Susan Collins, the new president of the Boston Fed, said that while a significant recession is likely, there is a chance that such a dire outcome could have been avoided. Atlanta Fed Chairman Rafael Bostic said the Federal Reserve has not lost credibility with the wider public.

Too Stock crashing? No, but this is why this bear market feels so painful – and what you can do about it.

companies in focus

— Jamie Chisholm contributed to this article.

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