Monday, June 13, 2022

US Market Wrap 06/13/2022

- As the effects from a scorching inflation report continued to rock global trading already unsettled by fears the Federal Reserve could push the economy into recession, US stocks entered a bear market, Treasury rates jumped to levels not seen in a decade, and the dollar rallied.

- Another wave of selling dropped the S&P 500 to its lowest level since January 2021, down more than 20% from its top in January. The Nasdaq 100 index fell nearly 4.5% as a result of the sell-off, with highly valued IT stocks bearing the brunt of the losses. In a rare instance of traders pricing in more uncertainty in the here-and-now than in three months, the CBOE Volatility Index surged above 30 and the futures curve inverted. Years of government handouts had inflated speculative parts of the market, which had buckled. Profitless software companies, freshly public enterprises, and entities with blank checks were all sold off. 

- Credit markets continued to reprice rate trajectories in the same way they have in the past. Treasury 10-year yields hit their highest level since 2011, while two-year rates hit levels not seen since the financial crisis of 2008. As a carefully studied part of the US bond curve inverted, the cost of protecting investment-grade paper from default skyrocketed. Only the dollar, which rallied to a two-year high, provided some relief from the selloff.

- Money markets now see the Fed terminal rate to be at 4% for the first time, and expect it to reach that level by the middle of next year. By September, traders expect 175 basis points of tightening, meaning two half-point and one 75-basis-point hike. If that happens, it will be the first time the Fed has moved at such a rapid pace since 1994. Officials are being kept silent ahead of the Fed's decision in two days and chair Jerome Powell's conference, where the characterisation of inflation and long-term expectations for the fed funds goal (the "dot plot") will be crucial.

- The rapid changes in the world's largest bond market portend more turmoil for the United States' already wounded stock market. Stocks have historically swooned when the 10-year treasury yield reaches 3%, as seen in early May and late 2018, according to datatrek research's Nicholas Colas. On Monday, it was hovering around 3.4%.

- According to strategists at Morgan Stanley, Goldman Sachs Group and Blackrock Investment Institute, equities still don't fully represent the risks threatening corporate earnings. Weaker consumer demand and aggressive Fed tightening in an effort to combat the hottest US economy Inflation over the next four decades might wreak havoc on corporate profits and, as a result, stock prices. "What's been missing the last several months is sort of what I would call a 'cathartic flush out,' where you get the VIX over 40, which is one of the things you need for at least a trading bottom," says Evercore strategist Julian Emanuel.

- If the mindset of CEO's is any indication, the last bastion in stocks is in risk of collapsing, according to a conference board study of corporate stewards, CEO confidence fell dramatically for the fourth consecutive quarter in the second quarter of this year. Historically, such pessimism has always coincided with a profit slump, according to Lisa Shalett, chief investment officer at Morgan Stanley Wealth Management.

- The loss in the highly speculative crypto market was astonishing, as the total value of all assets fell below $1 trillion, a two-thirds drop from the heady peaks seen in November. Bitcoin and its cousins have usually tracked risk assets, but the current drop, as much as 17% for the world's largest digital token, was accompanied by fears that the suspension of withdrawals at the celsius lending platform could signal systemic risk in the crypto world, speeding up the breakdown.