Stocks fall as Covid jitters weigh on risk mood: Markets end

(Bloomberg) – U.S. stocks fell for a second day amid weak holiday trading and Treasury yields rose as hopes of a year-end rally crumbled.

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The S&P 500 recorded an early advance, after sentiment worsened on fears that the end of China’s zero-Covid policy could lead to a rise in cases around the world. Trading volumes were around 20% below the 30-day average at this time of day. The 10-year yield pushed to 3.86% and oil fell. Tech stocks remained under pressure in the United States, even as Tesla Inc. sought to end a seven-day routine sparked by concerns about falling demand. A dollar gauge erased the losses.

The still cautious mood dampens hopes for a rally in the final trading week of 2022 after a brutal year for financial markets. Global equities lost a fifth of their value, the biggest decline since 2008 on an annual basis, and a global bond index fell 16%. The dollar jumped 7% and the US 10-year yield rose to over 3.80% from just 1.5% at the end of 2021, as the Federal Reserve continued an aggressive rate hike path to contain the inflation.

“We believe investors have become far too pessimistic given where we are in the rate hike cycle,” wrote Nancy Tengler, CEO and chief investment officer at Laffer Tengler Investments. After one of the fastest rate hike regimes in history, “we expect the economy to slow significantly or enter a recession at some point in 2023. Granted, a severe recession would be bearish for equities, but given the resilience of the US economy and tight labor market, we expect a slow to shallow and brief recession. This could allow equities to rebound in the second half of 2023.”

In a bid to revive Hong Kong as a financial hub, the city will end some of its last major Covid rules, scrapping collection limits for vaccination checks and testing for travellers. Yet while the dismantling of Covid curbs may be a boost for the global economy, there are concerns about inflationary pressures that could prompt US policymakers to maintain tight monetary policy.

Investors are also assessing Covid risks beyond China’s borders after nearly half of passengers on two flights to Milan were found to be carriers of the virus. Italian health authorities will begin testing all arrivals from China for Covid, and the health ministry has said that if a new strain is discovered, authorities may impose stricter restrictions on travel from China.

“Now that we’re almost a year into this bear market, at its lowest I think we were almost 30% down, we’ve seen enough to let us know that OK, we want to be on our toes for additional opportunities in this new year,” Sameer Samana of the Wells Fargo Investment Institute said on Bloomberg TV. Regarding China’s reopening, “being as fast as it happens probably complicates the Fed’s job in terms of actually put some supply under oil prices, put some supply under global inflation, global demand. It will be one of the most important things we will watch in the first half.

The effects of the Fed’s aggressive tightening policy are being felt in the housing market. Data showed on Wednesday that U.S. pending home sales fell for a sixth month in November to the second lowest on record. With borrowing costs roughly doubling from what they were at the start of the year, home sales, and therefore prices, have been falling for months.

Elsewhere in the markets, oil plunged amid weak liquidity as investors weighed the fallout from a Russian ban on exports to buyers who adhere to a price cap.

Key events this week:

• First unemployment claims in the United States, Thursday

• The ECB publishes its economic bulletin on Thursday

Some of the major movements in the markets:

Shares

• The S&P 500 fell 0.6% at 1:28 p.m. PT

• The Nasdaq 100 fell 0.7%

• The Dow Jones Industrial Average fell 0.5%.

• The MSCI World index fell 0.5%

Currencies

• The Bloomberg Dollar Spot Index was little changed

• The euro was little changed at $1.0631

• The British Pound rose 0.1% to $1.2041

• The Japanese yen fell 0.5% to 134.16 per dollar

Cryptocurrencies

• Bitcoin fell 0.4% to $16,629.5

• Ether fell 1.1% to $1,197.36

Obligations

• The yield on 10-year Treasury bills advanced three basis points to 3.87%

• Germany’s 10-year yield fell two basis points to 2.50%.

• The UK 10-year yield rose two basis points to 3.66%

Goods

• West Texas Intermediate crude fell 1.7% to $78.20 a barrel

• Gold futures fell 0.4% to $1,816.20 an ounce

This story was produced with assistance from Bloomberg Automation.

–With help from Richard Henderson, Robert Brand, Peyton Forte and Vildana Hajric.

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