Stocks Edge Higher in Run-Up to US Inflation Data: Markets Wrap

(Bloomberg) — Stocks continued to rebound after last week’s market meltdown as traders awaited inflation data that will help shape the outlook for the Federal Reserve’s next steps.

Most Read from Bloomberg

Equities extended gains into a third consecutive session. While the consumer price index probably picked up modestly in July, the annual metrics should continue to rise at a slow pace. The recent easing of price pressures has bolstered Fed officials’ confidence that they can start to lower borrowing costs while refocusing their attention on the labor market, which is showing greater signs of slowing.

To Chris Larkin at E*Trade from Morgan Stanley, the data will arrive at a key moment for market. In the span of just a few weeks, the discussion has shifted from whether the economy has slowed enough to concerns it may be “getting stuck in the mud,” he said.

“Investors will be looking for the numbers to land in a sweet spot — cool enough that no one will be second-guessing the likelihood of a September rate cut, but warm enough to push aside the recession concerns that have rattled the markets recently,” Larkin said.

Investors slashed equity allocations at the sharpest pace since the onset of the Covid pandemic during last week’s bout of market volatility, according to data from Deutsche Bank AG. A historical analysis of previous growth scares suggests that stock correlations and volatility will “will only gradually recede back to ‘normal,’” said Goldman Sachs Group Inc.’s David Kostin.

The risk-reward remains mixed over the summer months against the backdrop of weakening business activity and negative earnings revisions, according to JPMorgan Chase & Co strategists led by Mislav Matejka. A double whammy of economic uncertainty and a weak period for corporate earnings forecasts is likely to cap stock market gains, according to Morgan Stanley’s Michael Wilson.

The S&P 500 hovered around 5,350. The Cboe Volatility Index — the VIX — was fairly stable around 20. That’s after an unprecedented spike that took the gauge above 65 last Monday. That unusual surge has raised some questions on whether the index was actually “overstating” all that stress in the US stock market.

Subscribe to the Bloomberg Daybreak podcast on Apple, Spotify or anywhere you listen.

Story continues

Treasury 10-year yields were little changed at 3.93%.

Investors will have a brief window to buy the dip in US stocks at the end of this month as selling pressure from systematic funds eases while companies boost share buybacks, according to Scott Rubner at Goldman Sachs Group Inc.

“This will be my last bearish equity markets call for August as we are ending the worst of the equity supply and demand mismatch for August,” Rubner, the firm’s global markets division managing director and tactical specialist, wrote in a note to client.

At least one indicator suggests that last Monday’s drama looks more like a minor meltdown than a harbinger of worse things to come.

Consider the Cboe Volatility Index and the option-adjusted spread on the Bloomberg US Corporate Bond Index. Based on a long-term relationship between the two, the VIX’s close near 39 a week ago was supposed to correspond to a reading of 3.5% in corporate bond spreads. Yet they ended much lower, near 1.32%.

The mismatch between the two suggests the recent downdraft was technical and not indicative of economic doom, according to Bloomberg Intelligence strategists Christopher Cain and Michael Casper. In fact, such abnormal disconnects in the past have led to above-average returns for stocks over the next three-to-six months.

Tom Essaye at The Sevens Report says he doesn’t think fundamentals have deteriorated enough to warrant de-risking and reducing equity or risk exposure — but he also wants to caution against dismissing the recent uptick in volatility.

“Much of what I read over the weekend characterized this recent volatility as just a typical pullback in an upward-trending market,” Essaye. “Because of that, I continue to advocate for defensive sector exposure and and minimum volatility funds.”

Corporate Highlights:

• B. Riley Financial Inc. faces a widening US investigation into whether it gave investors an accurate picture of its financial health amid a string of losses and a sagging stock price.

• JetBlue Airways Corp. has kicked off a $2.75 billion bond-and-loan sale backed by its loyalty program as the carrier seeks to raise reserves and fund general corporate purposes.

• Bank of Nova Scotia agreed to buy a minority stake in KeyCorp, which was among the US regional banks hit hardest in last year’s tumult, for about $2.8 billion as part of a focus on North America.

• Vestas Wind Systems A/S issued a profit warning for its full-year results in a blow to the company’s effort to turnaround steep losses in recent years.

• Starboard Value, an investment firm with a history of taking activist positions in companies, has a stake in Starbucks Corp., according to a report.

• Hawaiian Electric Industries Inc. pegged losses from estimated accrual of liabilities stemming from one of the worst wildfires in US history at $1.7 billion and issued a going-concern warning.

Key events this week:

• Germany ZEW survey expectations, Tuesday

• US PPI, Tuesday

• Fed’s Raphael Bostic speaks, Tuesday

• Eurozone GDP, industrial production, Wednesday

• US CPI, Wednesday

• China home prices, retail sales, industrial production, Thursday

• US initial jobless claims, retail sales, industrial production, Thursday

• Fed’s Alberto Musalem and Patrick Harker speak, Thursday

• US housing starts, University of Michigan consumer sentiment, Friday

• Fed’s Austan Goolsbee speaks, Friday

Some of the main moves in markets:

Stocks

• The S&P 500 was little changed as of 10:09 a.m. New York time

• The Nasdaq 100 was little changed

• The Dow Jones Industrial Average fell 0.4%

• The Stoxx Europe 600 fell 0.1%

• The MSCI World Index was little changed

Currencies

• The Bloomberg Dollar Spot Index rose 0.2%

• The euro was little changed at $1.0919

• The British pound was little changed at $1.2762

• The Japanese yen fell 0.8% to 147.80 per dollar

Cryptocurrencies

• Bitcoin was little changed at $58,533.01

• Ether rose 3.1% to $2,635.95

Bonds

• The yield on 10-year Treasuries was little changed at 3.93%

• Germany’s 10-year yield was little changed at 2.23%

• Britain’s 10-year yield declined one basis point to 3.93%

Commodities

• West Texas Intermediate crude rose 1.5% to $78 a barrel

• Spot gold rose 0.8% to $2,451.41 an ounce

This story was produced with the assistance of Bloomberg Automation.

–With assistance from John Viljoen and Matthew Burgess.

Most Read from Bloomberg Businessweek

©2024 Bloomberg L.P.