Archives: Reuters Articles

NEW YORK, Aug 30 (Reuters) – US stocks closed lower for a third straight session on Tuesday as a rise in job openings fueled fears the US Federal Reserve has another reason to maintain its aggressive path of interest rate hikes to combat inflation.

The benchmark S&P 500 index has tumbled more than 5% since Fed Chair Jerome Powell on Friday reaffirmed the central bank’s determination to raise interest rates even in the face of a slowing economy.

Labor demand showed no signs of cooling as US job openings rose to 11.239 million in July and the prior month was revised sharply higher. A separate report showed consumer confidence rebounded strongly in August after three straight monthly declines.

“They have to weaken the labor market and how are they going to do that – they are going to jam rates and make things so expensive that people are going to pull back, demand is going to fall off, and people are going to get laid off,” said Ken Polcari, managing partner at Kace Capital Advisors in Boca Raton, Florida.

“It locks them in even further.”

The data increases the focus on the August non-farm payrolls data due on Friday.

The Dow Jones Industrial Average .DJI fell 308.12 points, or 0.96%, to 31,790.87, the S&P 500 lost 44.45 points, or 1.10%, to 3,986.16 and the Nasdaq Composite dropped 134.53 points, or 1.12%, to 11,883.14.

New York Fed President John Williams said on Tuesday the central bank will likely need to get its policy rate about 3.5% and is unlikely to cut interest rates at all next year as it fights inflation.

However, Atlanta Fed President Raphael Bostic said in an essay published on Tuesday the Fed could “dial back” from its recent string of 75 basis point hikes if new data shows inflation is “clearly” slowing. Richmond Fed President Thomas Barkin said the Fed’s pledge to bring inflation down to its 2% goal will not necessarily result in a severe recession.

Traders are pricing in a 74.5% chance of a third straight 75-basis point rate hike at the Fed’s September meeting.

Each of the 11 S&P 500 sectors were in negative territory, with the energy sector down 3.36%, the biggest percentage decliner, as oil prices settled down more than 5% on concerns that the slowing of global economies could sap demand.

Rate-sensitive megacap growth and technology stocks such as Microsoft Corp. (MSFT), down 0.85%, and Apple Inc. (AAPL), off 1.53%, were among the biggest drags on the benchmark index.

Both the S&P 500 and the Nasdaq have broken below their 50-day moving average. The S&P 500 also briefly fell below the 50% Fibonacci retracement level from its June low to August high, another key technical indicator watched by analysts as support.

The CBOE Volatility index, also known as Wall Street’s fear gauge, rose for the third straight session and hit a six-week high at 27.69 points.

Adding to worries, Taiwan’s military fired warning shots at a Chinese drone which buzzed an islet controlled by Taiwan near the Chinese coast.

Best Buy Co. (BBY) rose 1.61% as one of the biggest gainers on the S&P 500 after it reported a smaller-than-expected drop in quarterly comparable sales thanks to steep discounts.

Volume on US exchanges was 10.51 billion shares, compared with the 10.54 billion average for the full session over the last 20 trading days.

Declining issues outnumbered advancing ones on the NYSE by a 4.27-to-1 ratio; on Nasdaq, a 2.44-to-1 ratio favored decliners.

The S&P 500 posted no new 52-week highs and 18 new lows; the Nasdaq Composite recorded 15 new highs and 217 new lows.

(Reporting by Chuck Mikolajczak; Editing by David Gregorio)

NEW YORK, Aug 30 (Reuters) – US stocks are looking expensive again to some investors, as the Federal Reserve’s hawkish message lifts bond yields and pushes market participants to reassess equity valuations.

The S&P 500’s forward price-to-earnings ratio, a common metric for valuing stocks, has crept back up to around 17 times earnings after a sharp rebound in equities from their mid-June low.

That valuation – far below the nearly 22 times forward P/E stocks commanded at the start of the year – may have seemed reasonable earlier this month, when markets were rallying on hopes that the Fed would end its monetary tightening sooner than previously anticipated.

Fed Chairman Jerome Powell all but crushed those hopes with an unambiguously hawkish message at last week’s Jackson Hole conference, and some investors now believe stock valuations may have to fall further to reflect the risks of rising bond yields and a looming recession.

Comparatively modest valuations were one of the biggest positives the market possessed at the end of the second quarter, when stocks stood near their lowest levels in 1-1/2 years after a six-month shellacking and forward P/E hovered at just above 15 times, said Matthew Miskin, co-chief investment strategist at John Hancock Investment Management.

After rallying 10% from their mid-June lows, stocks are “not pricing in as much risk, and that is something that the market is going to have to grapple with as we get through the back half of 2022,” Miskin said.

Among the dangers to equities is a rise in Treasury yields that has accelerated as investors come around to the idea that the Fed is determined to raise interest rates higher than markets had previously expected.

Climbing Treasury yields, which move inversely to bond prices, tend to pressure equities, in part because US government bonds offer a risk-free alternative to stocks. Rising yields weigh particularly on valuations of companies such as those in the technology sector that have high expected future earnings and are significant parts of indexes like the S&P 500.

The mid-June low for the S&P 500 came as the yield on the 10-year US Treasury note rose to about 3.5%, its highest level in over a decade. After sliding during the summer, the 10-year yield has rebounded to 3.1%.

As a result, the equity risk premium, the extra return investors expect to receive for holding stocks over risk-free government bonds, has recently fallen to roughly its lowest point since 2009, according to the Wells Fargo Investment Institute. Analysts there recommend that investors skew their portfolios away from equities and toward fixed income and commodities.

The stock market is “incredibly expensive when compared to the now-higher 10-year yield,” said Sameer Samana, senior global market strategist at Wells Fargo Investment Institute.

The S&P 500 has fallen 5% since Powell’s speech on Friday, as investors adjust their expectations for how high the Fed will lift rates. The S&P 500 was down 0.9% on Tuesday afternoon.

“The market had too quickly priced in a soft landing and had little room for error left,” wrote Keith Lerner, co-chief investment officer at Truist Advisory Services. “However, even after the pullback, it’s too soon to say the risk/reward is compelling.”

Still, current valuations are at a “premium level” given uncertainty in the earnings outlook and continued monetary tightening, Lerner said in a note on Monday. Based on current forward earnings projections, Lerner estimates a decline in the S&P 500’s P/E to 15 times would put the index at just above 3,600, around its June lows and equivalent to a drop of more than 10% from Monday’s closing level.

To be sure, there have been compelling arguments for owning stocks in recent months.

A better-than-expected US second-quarter earnings season, despite a cloudy economic outlook, helped fuel the recent rebound in stocks. S&P 500 earnings are now expected to rise about 8% in 2022.

But the profit outlook stands to weaken if the Fed raises rates so much that it results in a recession, as some investors expect. Data indicates more analysts are cutting earnings estimates as opposed to raising them, wrote Morgan Stanley strategists, presenting another potential threat to valuations.

Troy Gayeski, chief market strategist for FS Investments, said he sees little reason to own most stocks as the Fed hikes rates.

“We are staying very defensive,” he said. “It’s an environment to protect capital.”

(Reporting by Lewis Krauskopf in New York; Additional reporting by Megan Davies in New York; Editing by Ira Iosebashvili, Matthew Lewis and Jonathan Oatis)

SHANGHAI, Aug 30 (Reuters) – China stocks ended lower on Tuesday, as more cities tightened COVID-19 restrictions in response to rising cases, fuelling fears of a further economic slowdown.

Investors were also concerned about tightening global monetary policies, which could drain liquidity and limit room for China continue easing its policy.

The CSI 300 Index fell 0.3% at close, while the Shanghai Composite Index was down 0.4%.

The Hang Seng Index  dropped 0.4%, while the Hang Seng China Enterprises Index  lost 0.5%.

Other Asian stock markets attempted to steady as investors turned their focus to this week’s US labour market report to gauge if interest rate hikes that have been priced in around the world are justified.

Several big Chinese cities escalated COVID-19 restrictions on Tuesday, with Shenzhen closing more businesses and Dalian locking down millions.

“Despite a decline in headline COVID cases, the actual COVID situation in China might be worsening,” Nomura analysts said in a note. “Markets could once again be hit in the next couple of weeks, likely triggering another round of cuts (in GDP forecasts) by economists on the street.”

Energy companies slumped more than 4%, with coal miners shedding 5.4% to lead the decline.

Energy stocks have gained more than 12% so far in the month, amid a supply shortage due to China’s most severe heatwave in decades.

State media reported over the weekend that the power crunch driven by drought in the southwestern province of Sichuan had started to ease as temperatures fell.

Real estate stocks rose 1.9% after Caixin reported China would issue CNY 200 billion (USD 29 billion) in special loans to help developers finish stalled housing projects.

China will step up measures to boost demand and stabilise employment and prices in the second half to optimise economic outcomes, the country’s finance ministry said on Tuesday.

Tech giants listed in Hong Kong edged down 0.5%.

China and the United States made a breakthrough in an audit deal, but legal experts and China watchers warn the two sides could still clash over how the accord is interpreted and implemented.

(Reporting by Shanghai Newsroom; Editing by Subhranshu Sahu and Rashmi Aich)