You're a mean one, Mr Grinch: Stocks tank in the wake of solid data
- Main indexes close sharply lower
- All major S&P 500 sectors end red, led by energy
- Transports, banks, smallcaps hit hardest
- Dollar gains; gold, crude, bitcoin down
- U.S. 10-Year Treasury yield rises to ~3.59%
YOU'RE A MEAN ONE, MR GRINCH: STOCKS TANK IN THE WAKE OF SOLID DATA (1616 EST/2146 GMT)
Wall Street was in no mood for unexpected services sector strength or an upside surprise in factory orders, with all three major U.S. stock indexes ending the session deep in negative territory.
All three shed more than 1%, with the tech-heavy Nasdaq IXIC suffering the steepest loss, down 1.9% on the day.
As with Friday's blowout jobs report, evidence of economic resilience - usually cause to celebrate - is stoking fears that Powell & Co will keep interest rates higher, longer.
Amid a catalyst desert, investors have little to do but fret until a week from tomorrow, when crucial consumer price data (CPI) is released just as the Federal Reserve convenes for its next monetary policy meeting.
Analysts expect CPI to show a cooling in headline inflation but an increase in the core measure, which strips out volatile food and energy prices.
As for the Fed, financial markets have priced in a 77% likelihood of a 50 basis point interest rate hike, according to CME's FedWatch tool, a welcome slowdown after a barrage of super-sized 75 bp increases.
Here's your closing snapshot:
STRONGER DATA A ‘REALITY CHECK’, FED COULD GO HIGHER FOR LONGER (1345 EST/1845 GMT)
Surprisingly resilient jobs and spending data last week has “delivered a reality check” and makes it more likely that the Federal Reserve could hike rates higher and for longer than many expect, according to Barclays Capital.
“The US economy is holding up better than we had expected,” Barclays said in a report. “This likely reinforces the need for the Fed to proceed with its plan for further aggressive rate hikes.”
To protect against this possibility the bank recommends investors be short front-end rates.
“We still think the Fed will step down its hiking pace next week but note upside risks,” Barclays said. “We recommend positioning for tail scenarios of 'higher for longer' and a deeper recession.”
The U.S. central bank is expected to hike rates by an additional 50 basis points when it concludes its two-day meeting on Dec. 14. Fed funds futures traders are pricing for the fed funds rates to peak at 4.99% in May. (FEDWATCH)
CRYPTO COLLAPSE AND OTHER SURPRISES IN STORE FOR 2023 (1330 EST/1830 GMT)
Crypto assets have had a tough year, but the worst may not over yet. According to a note by Standard Chartered on Sunday, crypto could be in for an ugly "surprise" in 2023 if the current collapse spreads.
Bitcoin, the world's largest cryptocurrency, is down 63% so far this year, as risk off sentiment weighed on digital assets and crypto firms succumbed to liquidity squeezes and investor withdrawals.
In their surprise scenario for 2023, Standard Chartered's global head of research Eric Robertsen sees the bursting of the crypto bubble to continue, with Bitcoin BTCUSD falling to $5,000.
The digital currency hit $69,000, its all-time high in November 2021.
The collapse of crypto could in turn boost gold and see it reclaim the title of safe haven as equities resume their bear market and the correlation between equity and bond prices shifts back to negative, added Robertsen.
Other surprise scenarios that the markets may be ignoring or under-pricing, according to Robertsen, include:
1. Brent oil falls to $40 per barrel as global recession crushes demand for oil.
2. EUR-USD rallies to $1.25 on political stability and economic recovery as weaker energy prices and peace in the region lead to a peace dividend.
3. The FOMC cuts rates by 200bps in 2023 as layoffs spread from the tech sector to housing and retail to industrials and financial services and the Fed discovers the U.S. economy wasn’t so resilient after all.
4. The NDX 100 falls another 50% to 6,000 as next-generation technology companies see a surge in bankruptcies in 2023, echoing the digital assets crisis.
5. USD-CNH falls to 6.40 as China surprises with aggressive reopening.
6. Good weather combines with the peace dividend to cool food prices, fueling fears of deflation.
7. Republicans impeach U.S. President Joe Biden and the U.S. political environment deteriorates further before the 2024 election.
All in all, market volatility could remain "extremely high" in 2023.
(Bansari Mayur Kamdar)
MID-CAPS 2022'S MAN-OF-STEEL, SMALL-CAPS 2023'S MIGHTY MOUSE? (1247 EST/1747 GMT)
It's been a rough year for stocks in 2022 regardless of which strata of market cap you may hail from.
Indeed, with less than a month of trading to go, the S&P 500 SPX is last off nearly 16% for the year, or its biggest yearly decline since 2008.
That said, both small and mid-caps have held up somewhat better.
The S&P 600 small-cap index (.SPCY) is last off more than 13% this year, while the S&P 400 mid-cap index MID is off just over 11% in 2022.
Using Refinitiv data back to 1994, and prior to this year, the SPX has outperformed the IDX and the SPCY in 14 of the 27 years (52%). The SPCY has outperformed the SPX and the IDX eight times or about 30% of the time. The IDX has outperformed the SPX and the SPCY just 5 times, or about 19% of the time.
In the wake of the five years when mid-caps provided the best relative performance, the SPCY proved to be the next year's hero. The SPCY outperformed the SPX and IDX in all five of the following years (100%), posting an average gain of 10.5% (median 12.3%).
Thus, as the market approaches year-end, traders will be watching to see how these indexes perform down the homestretch.
Q4 U.S. EARNINGS ESTIMATE SLIPS FURTHER (1212 EST/1712 GMT)
The forecast for fourth-quarter S&P 500 SPX earnings dipped further in the past week, with analysts now expecting earnings for the period to decline 0.6% from the year-ago quarter, according to IBES data from Refinitiv as of Friday.
A week earlier, analysts were expecting a decline of 0.4% in earnings for the quarter.
The biggest year-over-year earnings declines are expected in materials S5MATR, estimated down 21.6%; communication services S5TELS, seen down 20.8%; and in consumer discretionary S5COND, seen down 14.3%, based on the data.
Analysts also project an 8.3% year-over-year drop in earnings from the heavily weighted technology S5INFT sector. A week earlier, they were expecting a 7.8% decline in technology earnings for the fourth quarter.
Investors are focused on estimates for the fourth quarter after some big disappointments in the third-quarter reporting period, which is all but finished. Earnings for the third quarter rose just 4.4% from the year before, per Refinitiv data.
A decline in fourth-quarter earnings would be the first quarterly decline in S&P 500 earnings since the third quarter of 2020, based on Refinitiv data.
THANK YOU FOR YOUR SERVICES: PMI, FACTORY ORDERS (1121 EST/1621 GMT)
In the ongoing brawl between services and manufacturing sectors, the former appears to be landing more punches.
Customer-facing services suffered the brunt of COVID lockdowns as demand shifted to goods, but have roared back to life since restrictions were lifted.
Indeed, spending on services was solely responsible for the personal consumption contribution to third-quarter GDP, a fact which plainly demonstrates the demand pivot back to services remains in full swing.
The index landed at 56.5, a 2.1-point advance, in defiance of the 53.3 consensus.
A PMI number over 50 indicates monthly expansion.
This marks the series' 30th consecutive month in expansion territory and demonstrates a fairly stark divergence from ISM's manufacturing PMI released on Thursday, which showed the sector dipping into contraction for the first time since the pandemic shutdown drove the global economy to its knees.
"Based on comments from Business Survey Committee respondents, increased capacity and shorter lead times have resulted in a continued improvement in supply chain and logistics performance," writes Anthony Nieves, chair of ISM's Services Business Survey Committee. "A new fiscal period and the holiday season have contributed to stronger business activity and increased employment."
The commentary from survey participants back up Nieves' sunny words, with remarks such as "new business requests are solid," and "supply chain issues are stabilizing" offsetting concerns about the tight labor market and inflation.
Inflation, in fact, was a sore point. The prices paid element barely budged from its elevated perch.
Here we see a breakdown of some of the index's components:
S&P Global also released its final take on PMI (USMPSF=ECI), which came in at 46.2, just a hair better than its initial "flash" reading released mid-November.
"The survey data are providing a timely signal that the health of the US economy is deteriorating at a marked rate," says Chris Williamson, chief business economist at S&P Global Market Intelligence. "A striking development is the extent to which companies are increasingly reporting a shift towards discounting in order to help stimulate sales, which augurs well for inflation to continue to retrench in the coming months, potentially quite significantly."
S&P Global and ISM differ in the weight they apply to their various components (new order, employment, etc.)
The graphic below handily demonstrates the extent to which the dueling PMIs disagree, which is more pronounced on the services side.
But of course October is ancient history, harkening back to a time when ISM's manufacturing PMI was still clinging to expansion territory:
The Commerce Department also updated their initial durable goods data, which showed new orders for core capital goods (which strips away aircraft and defense, and is widely considered a barometer for corporate spending plans), were a tad weaker than originally reported, rising 0.6% in a partial rebound from September's 0.8% drop.
A broad sell-off dragged Wall Street lower in morning trading, although the indexes were last off earlier lows.
Airlines provided a rare glimpse of green, with the S&P 1500 airlines index (.SPCOMAIR) taking off.
STOCKS BROADLY RED, SERVICES SECTOR ACTIVITY PICKS UP(1010 EST/1510 GMT)
Stocks opened broadly lower on Monday as investors worry that the recent rally may be overstretched and after data showed that U.S. services industry activity unexpectedly picked up in November.
Trading may be choppy this week as investors wait on highly anticipated consumer price inflation data due next week, which will be followed by the Fed's interest rate decision. The U.S. central bank is expected to hike rates by another 50 basis points when it concludes its two-day meeting on Dec. 14. (FEDWATCH)
The S&P 500 SPX was the weakest major index, dropping 1.06%. All major S&P 500 subsectors were in the red.
Here is where markets stand in early trading:
"FLYING BLIND" TOWARDS CHINA AS HOPES OF EASING GROW (0944 EST/1444 GMT)
Chinese stocks have had a tough year. The Nasdaq Golden Dragon China Index HHXC, that looks at U.S.-listed Chinese stocks, is down 23.3% so far this year as Beijing's stringent COVID curbs hobble the world's second largest economy.
Nevertheless, things seem to be turning around. The HXC rallied nearly 42% in November, its best monthly performance ever, over growing signs that the authorities appear to be still moving in the direction of opening up despite the rapid rise in new cases.
"The absence of macro & micro data means investors are 'flying blind', relying on mobility and stringency data," said analysts in a Jefferies note. "U.S. monetary conditions are easing and helping to underwrite the rally."
The new measures will supplement the 20 unveiled in November that set off a wave of COVID easing steps nationwide.
Morgan Stanley updated its China equity recommendation to overweight, citing "multiple positive developments alongside a clear path set towards reopening."
The Jefferies analysts said they will be looking at three key events for further cues - the China Central Economic Work Conference in mid-December, the early Chinese New Year starting on January 22, 2023 and the rubber-stamping of annual parliament commencing in Spring 2023.
(Bansari Mayur Kamdar)
DON'T STOCK UP JUST YET! (0920 EST/ 1420 GMT)
Morgan Stanley believes the recent bear market rally in U.S. equities is treading dangerous waters and recommends investors book profits and play it safe with defensive buys such as healthcare and utilities.
While the S&P 500 SPX is trading above its 200-day moving average price, it has recorded steep losses for the year, and positioning for further upside is risky, Morgan Stanley chief U.S. equity strategist Michael Wilson said in a note.
The Wall Street bank says they're sellers of equities again, noting that growth stocks such as technology and some consumer-linked sectors are unlikely to benefit from falling interest rates given the risk to earnings.
"We are now right into our original upside targets (4,000-4,150) and we recommend taking profits before the Bear returns in earnest," MS strategists say.
The S&P 500 ended down 0.1% at 4,071.70 on Friday after a solid jobs report weighed on hopes for a less aggressive Federal Reserve. But the index is still up nearly 11% from its October closing lows.
S&P 500 INDEX: MOTH TO THE FLAMES (0900 EST/1400 GMT)
Traders remain keenly focused on the S&P 500 index SPX as it flutters around, and between, a number of brightly lit chart levels:
With e-mini S&P 500 futures ES1! suggesting an SPX drop of more than 20 points or so at the open, it looks like the 200-DMA will be tested again in early trade.
Friday's intraday low was at 4,026.83 and the 61.8% Fibonacci retracement of the August-October down-leg is at 4,006. This level should now attempt to act as support.
The SPX has additional support in the 3,937-3,906 area. This zone includes the November 29 and November 17 lows, as well as the 100-DMA, which ended Friday at 3,926.26, and is now rising about 3 points per session, and the 50% retracement of the August-October down-leg at 3,908.
Of note, on the plus-side, the 100-DMA, which contained mid- and late-November weakness, has now risen 20-straight trading days. That's its longest such streak since the SPX's early January 2022 top.
Meanwhile, the resistance line from the early-January high now comes in around 4,097 on Monday. This line, which is falling around 3 points per-session, capped strength on December 1, when the SPX topped at 4,100.51, or less than 3 points shy of it at the time.
There are, of course, additional levels to contend with in the event of a breakout in either direction, but traders will be watching closely for signs of momentum in the event any of these nearby levels give way.