Global market news: Stocks plunge as bear-trap worry returns after rally

As equities come off overbought levels, Treasuries are also taking a hit following the best start to a year for cross-asset returns since 1987. Geopolitical concerns still simmered on the background, with the US preparing to impose a 200% tariff on Russian-made aluminum and US-listed Chinese shares tumbling as Washington’s move to shoot down an alleged surveillance balloon from the Asian nation.

A rout in megacaps like Apple Inc., Amazon.com Inc. and Google’s parent Alphabet Inc., which reported results last week, also weighed on sentiment. The group’s reality check came after the Nasdaq 100 approached bull-market territory. Investors will continue to focus on earnings to figure out whether the recent rally was a “bear trap” driven by “fear of missing out,” noted Chris Larkin at E*Trade from Morgan Stanley.

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“The major averages have become overbought after their strong January rallies, so even the biggest bulls on the Street would admit that we could see a short-term pullback at any time,” said Matt Maley, chief market strategist at Miller Tabak + Co. “We are not trying to say that any short-term pullback will be followed by another strong rally. In fact, we believe that a short-term pullback could — and probably will — turn into another leg lower in the bear market that began just over a year ago.”

The S&P 500 now accurately reflects signs of better-than-expected economic growth and a drop in bond yields, according to Goldman Sachs Group Inc. strategists led by David J. Kostin. At the same time, higher valuations, lackluster corporate earnings and elevated interest rates mean there’s little room for the rally to extend, they said, a view that was broadly echoed by their counterpart at Morgan Stanley, Michael Wilson.

Profit margins are off their peaks, and will be pressured even further by a tight labor market and waning pricing power, Bank of America Corp. strategists wrote. Companies, “now in belt-tightening mode,” will have a tougher time passing on rising costs to consumers.

To Solita Marcelli at UBS Global Wealth Management, the risk-reward trade-off for equities does not look appealing. She continues to recommend that equity investors position defensively and be prepared for additional volatility ahead.

A slate of Fed speakers this week — including an eagerly awaited interview with Chair Jerome Powell Tuesday — will help shape the views on the outlook for rates. Fed funds futures show another 25 basis-point hike in March as nearly a done deal — while pegging a 75% chance of another one in May. The odds for a June hike have also risen to 28% from 8% last Monday. 

That would take the terminal upper bound range of interest rates to 5.5% — higher than the rate implied by the 5.125% median in the central bank’s latest projections.

“Fed Chair Powell remains a big wild card every time he speaks,” said Chris Senyek at Wolfe Research. “Investors will be looking to see if he ‘walks back’ his very dovish tone from last Wednesday, particularly with respect to financial conditions and the US ‘disinflationary process.’ We still believe that the Fed will be ‘higher for longer’.”

Now with the path for further monetary tightening in focus, bond investors still broadly expect US inflation to ebb further. The so-called breakeven rate on five-year five-year forwards — a proxy for inflation expectations — slumped to 2.18% on Friday from 2.31% a week prior. It was little changed Monday. 

A similar gauge for 10-year inflation-linked bonds, meantime, hovered near 2.25% Monday. That compares to a recent peak of 2.6% in late-October, according to data compiled by Bloomberg. Separately, a recent drop in the price of gasoline futures weighed on short-term breakevens. 

“Inflation will not necessarily follow the exact path as the 1970s,” said Seema Shah at Principal Asset Management. “While price pressures in both eras originated from a toxic mix of supply chain challenges, elevated oil prices, and excessively stimulative fiscal and monetary policy, the Fed’s framework today is more transparent and more focused on price stability. As a result, inflation expectations are better anchored, suggesting inflation should be quicker to normalize.”

Meantime, the divergence between the Nasdaq 100 and 10-year Treasury yields is becoming extreme, which has been a negative signal for the index during the past 18 months, according to cross-asset sales trader Gurmit Kapoor. The tech-heavy benchmark has been particularly sensitive to the bond market, and has seen strong corrections during the past four occurrences when it decoupled from rates.

In corporate news, Dell Technologies Inc. is eliminating about 6,650 roles as it faces plummeting demand for personal computers, becoming the latest technology company to announce thousands of job cuts. Tyson Foods Inc., the biggest US meat company, said fiscal first-quarter earnings plunged 70% from a year ago and missed expectations.

A flurry of big deals in sectors ranging from mining to storage has provided respite for the world’s dealmakers after their slowest start to a year in two decades. More than $40 billion in potential transactions came to light over the weekend and into Monday, according to data compiled by Bloomberg.

Elsewhere, the yen fell on the back of a Nikkei report that the Japanese government approached Bank of Japan Deputy Governor Masayoshi Amamiya about succeeding Haruhiko Kuroda at the helm of the central bank.

This story has been published from a wire agency feed without modifications to the text. Only the headline has been changed.