Finance

Stocks fall as Treasuries face $44 billion selloff: Markets align

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2 months ago

May 29, 2024

Stocks fall as Treasuries face $44 billion selloff: Markets align

(Bloomberg) — The stock market came under pressure, with traders on high alert for the $44 billion sale of seven-year bonds that follows two weak auctions this week.

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Treasury sales are increasingly having an impact on stocks, underscoring how uncertainties over Federal Reserve policy continue to grip markets as inflation shows little sign of moderating. With concerns that increasing supply will push bond yields higher – creating headwinds for stocks – these auctions are being closely watched. And they come at a time when stocks didn’t necessarily look cheap.

“The situation right now is quickly becoming alarming,” said Matt Maley of Miller Tabak + Co. “Not only are interest rates rising again in the US, but they are also rising in other parts of the world. That is not good news for a stock market that is trading at 22 times expected earnings.”

The S&P 500 fell below 5,300 points. All major groups withdrew. American Airlines Group Inc. plummeted 15% after disappointing prospects. UnitedHealth Group Inc. led the industry losses after citing a “disruption” in Medicaid. Marathon Oil Corp. made a huge leap after ConocoPhillips agreed to acquire the company in a $17 billion deal.

In the government bond market, longer maturities led to losses, with 30-year yields rising seven basis points to 4.73%. The dollar rose. European bond issuance has surpassed the €1 trillion ($1.1 trillion) mark this year, more than a week ahead of the previous record. German government bond yields hit a six-month high as inflation accelerated.

“Equities are waking up to higher global long-term interest rates,” said Andrew Brenner of NatAlliance Securities. “The street has become too long and is now paying the price. And global rates are starting to look even uglier.”

According to Tom Essaye of The Sevens Report, the auction will likely be the biggest catalyst for the markets for seven years.

“Another soft auction outcome will put further pressure on stocks, while strong demand for the notes could help stabilize stocks,” he noted.

Just a few days before the Fed’s favorite price gauge, the central bank will release the Beige Book survey of regional business contacts. The latest report, published April 17, said the U.S. economy has “grown slightly” since late February and companies are reporting greater difficulties in passing on the higher costs.

“We expect a balanced tone in this report, allowing the Fed to take a wait-and-see approach to easing,” said Win Thin and Elias Haddad of Brown Brothers Harriman & Co.

Fed Chairman Jerome Powell and his colleagues have stressed the need for more evidence that inflation is on a sustainable path to its 2% target before cutting rates, which have been at a 20-year high since July.

“We continue to believe that US Treasury yields should end the year lower as inflation and economic growth slow and the Fed cuts rates in the final months of the year,” said Solita Marcelli of UBS Global Wealth Management.

The options market is betting that the S&P 500 will see moderate swings after this week’s bond auctions and the Fed’s favorite underlying inflation gauge Friday, with traders instead looking ahead to next month’s consumer prices and the upcoming central bank meeting.

According to Stuart Kaiser, head of U.S. equity trading at Citigroup Inc., the benchmark stock index would move just 0.5% in either direction based on the cost of at-the-money puts and calls. strategy.

The outcome is less than the implied move on June 7 – the next jobs report – and the CPI and the Fed’s upcoming rate decision – both on June 12, which would be the biggest in the run-up to a central bank meeting since December, Kaiser said.

Economists expect the PCE minus food and energy to rise 0.2% in April. That would mark the smallest progress so far this year on the measure, which provides a better snapshot of underlying inflation.

The overall PCE price index probably rose by 0.3% for the third month. The increases this year are in stark contrast to relatively flat numbers in the final three months of 2023, underscoring the Fed’s uneven progress in its fight against inflation.

Business highlights:

The shares of Abercrombie & Fitch Co. rose after the retailer exceeded first-quarter sales expectations, continuing its recovery from the teen fashion graveyard.
Dick’s Sporting Goods Inc. raised its outlook for the year, reporting sales that exceeded analyst estimates, with strong demand for sporting goods across all categories.
Robinhood Markets Inc. announced a plan to repurchase as much as $1 billion of its own stock.
Lenovo Group Ltd. plans to sell $2 billion in zero-coupon convertible bonds to Saudi Arabia’s sovereign wealth fund, as part of a broader strategic pact with the tech-hungry kingdom.

Main events this week:

Economic confidence in the eurozone, unemployment, consumer confidence, Thursday
US initial unemployment claims, GDP, Thursday
The Fed’s John Williams and Lorie Logan will speak Thursday
Unemployment in Japan, CPI in Tokyo, industrial production, retail sales, Friday
China official manufacturing and non-manufacturing PMI, Friday
Eurozone CPI, Friday
US consumer income, spending, PCE deflator, Friday
Raphael Bostic of the Fed will speak on Friday