Stocks Slip in Rally Reality Check; Bond Gain: Markets Wrap

(Bloomberg) — Stocks fell on Tuesday as the second-quarter rally faced resistance from economic headwinds and signs of stretched positioning. Treasuries advanced.

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US stocks fell as the S&P 500 retreated from a 14-month high hit last week. Nike Inc. fell on inventory concerns while PayPal Holdings Inc. climbed after reaching a loan deal with KKR & Co.

Investors caught between fears of missing out and worries the markets have run too far, too fast are grappling with excessive valuations and economic headwinds. Bullish positioning in U.S. stock futures grew last week, taking it to the most extended levels for the S&P 500 and Nasdaq 100 in data going back to 201[ads1]0, according to Citigroup strategists.

“In the short term, six to 12 months, we are navigating treacherous waters,” Sebastien Page, chief investment officer at T Rowe Price, told Bloomberg Television. Growth stocks – particularly those in the technology sector – have been driven by a number of factors, including “positive surprises” on earnings and advertising as well as excitement about artificial intelligence, he added. “It’s part of the value versus growth equation.”

The trajectory of US monetary policy is another wild card. Federal Reserve Chairman Jerome Powell will give his semi-annual report to Congress on Wednesday. The politicians at the Fed kept interest rates unchanged at their last meeting, but warned of more tightening going forward. Investors are also awaiting the outcome of political meetings in Turkey, the UK and Switzerland.

The Fed decision last week came with forecasts for higher borrowing costs of 5.6% in 2023, implying two more quarterly rate hikes or a half-point increase before the end of the year.

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This contrasts with the market pricing of around 20 basis points of tightening for the rest of the year.

“Generally, a high-multiples environment is only accompanied by a declining policy rate when earnings have collapsed,” wrote Mike O’Rourke of JonesTrading. “It will require a reality check in shares together with economic headwinds before interest rate cuts appear. High share multiples and high interest rates are not a relationship that can be sustained in the long term.”

U.S. Treasury yields traded near session lows after jumping amid an unexpected surge in housing starts in May, the highest since 2016.

“This is strong data,” Sonal Desai, chief investment officer of Franklin Templeton Fixed Income, told Bloomberg Television. “It continues to feed into the narrative that housing, the fresh start, is not going to be the first place to collapse.”

Meanwhile, in global currencies, the Swedish krona fell to a record low against the euro as traders expect the Riksbank to hit the brakes on interest rate hikes in the coming months.

Gold and oil retreated after disappointment over China’s stimulus measures. U.S.-listed Chinese stocks also fell, and Alibaba Group Holding Ltd. fell around 4.5% after the surprise replacement of the managing director and chairman of the board.

Important events this week:

• Federal Reserve Bank of St. Louis President James Bullard speaks Tuesday

• New York Fed President John Williams speaks on Tuesday

• Federal Reserve Chairman Jerome Powell delivers biannual congressional testimony before the House Financial Services Committee on Wednesday

• Federal Reserve Bank of Chicago President Austan Goolsbee speaks Wednesday

• Consumer confidence in the eurozone, Thursday

• Consider decisions in UK, Switzerland, Indonesia, Norway, Mexico, Philippines, Turkey, Thursday

• US Conference Board leading index, initial jobless claims, checking account, existing home sales, Thursday

• Federal Reserve Chairman Jerome Powell delivers biannual testimony to Congress before the Senate Banking Committee on Thursday

• Cleveland Fed’s Loretta Mester speaks Thursday

• Eurozone S&P Global Eurozone Manufacturing PMI, S&P Global Eurozone Services PMI, Friday

• Japan CPI, Friday

• US S&P Global Manufacturing PMI, Friday

• Federal Reserve Bank of St. Louis President James Bullard speaks Friday

Some of the main features of markets:

Stock

• The S&P 500 was down 0.9% at 10:26 a.m. New York time

• The Nasdaq 100 fell 0.7 percent

• The Dow Jones Industrial Average fell 1.1 percent

• The Stoxx Europe 600 fell 0.5 percent

• The MSCI World index fell 0.8 percent

Currencies

• The Bloomberg Dollar Spot index rose 0.3 percent

• The euro fell 0.2% to $1.0904

• The British pound fell 0.6% to $1.2721

• The Japanese yen rose 0.2% to 141.67 per dollar

Cryptocurrencies

• Bitcoin fell 0.1% to $26,679.78

• Ether fell 0.9% to $1,714.98

Bonds

• The yield on 10-year government bonds fell five basis points to 3.71%

• Germany’s 10-year yield fell 11 basis points to 2.41%

• UK 10-year yields fell 16 basis points to 4.34%

Raw materials

• West Texas Intermediate crude fell 3% to $69.65 a barrel

• Gold futures fell 1.4% to $1,943.50 an ounce

This story was produced with assistance from Bloomberg Automation.

–With assistance from Cecile Gutscher.

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