Global markets news: Recession worries drag down stocks after rally

As equities slide below overbought levels, Treasuries are also taking a hit after their best start to a year for cross-asset returns since 1987. Geopolitical concerns still loom on the background, with the US preparing to impose a 200% tariff on Russian-manufactured goods. Aluminum and US-listed Chinese shares fell as Washington moves to shoot down an alleged surveillance balloon from the Asian nation.

Apple Inc., Amazon.com Inc. and Google’s parent Alphabet Inc. Like a defeat in MegaCaps, which reported results last week, also weighed on the sentiment. The group’s reality check came after the Nasdaq 100 entered bull-market territory. Chris Larkin at Morgan Stanley’s E*Trade said investors will continue to focus on earnings to determine whether the recent rally was a “bearish trap” driven by “fear of missing out.”

Read also: US market news: Wall Street falls on growing fears of the Federal Reserve

“The major averages have become overbought after their strong January rallies, so even the biggest bulls on the Street will admit that we could see a short-term pullback at any time,” said Matt Maley, chief market strategist at Miller Tabak + Company. “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 – be another leg lower in the bear market that Just started a year ago.”

David J. Kostin-led Goldman Sachs Group Inc. According to U.S. strategists, the S&P 500 now accurately reflects signs of better-than-expected economic growth and declining bond yields. At the same time, high valuations, low corporate earnings and high interest rates mean there is little room to extend the rally, he said, a view largely echoed by his counterpart at Morgan Stanley, Michael Wilson.

Bank of America Corp strategists wrote that profit margins are far from their peak, and a tight labor market and shrinking pricing power will add even more pressure. Companies, “now in belt-tightening mode,” will have a hard time passing the rising costs on to consumers.

For Solita Marcelli at UBS Global Wealth Management, the risk-reward trade-off for equities doesn’t look attractive. She continues to recommend that equity investors position defensively and prepare for additional volatility ahead.

A list of Fed speakers this week – including an eagerly awaited interview with Chair Jerome Powell on Tuesday – will help shape views on the outlook for rates. Fed funds futures show another 25 basis-point hike in March as nearly complete — while another 75% in May are likely. The odds of a hike in June have also increased to 28% from last Monday’s 8%.

This would take the terminal upper limit of interest rates to 5.5% – higher than the rate implied by the 5.125% median in the central bank’s latest estimates.

“Fed Chair Powell continues to be a big wild card every time he speaks,” said Chris Senyak at Wolfe Research. US ‘deflation process.’ We still believe the Fed will be ‘high for a long time’.”

With the focus now on the path of more monetary tightening, bond investors still broadly expect US inflation to decline further. The five-year forward five-year so-called break-even rate – a proxy for inflation expectations – fell to 2.18% on Friday from 2.31% a week ago. There was a slight change in this on Monday.

A similar gauge for the 10-year inflation-linked bond held near 2.25% on Monday. That compared with a recent peak of 2.6% in late October, according to data compiled by Bloomberg. Separately, the recent decline in the price of gasoline futures weighed on short-term breakeven.

“Inflation will not necessarily follow the exact path of the 1970s,” said Seema Shah at Principal Asset Management. Today, the Fed’s framework is more transparent and more focused on price stability. As a result, inflation expectations are optimally stable should inflation be quick to normalize. ,

Meanwhile, according to cross-asset sales trader Gurmeet Kapoor, the divergence between the Nasdaq 100 and 10-year Treasury yields is peaking, which has been a negative sign for the index over the past 18 months. The tech-heavy benchmark has been particularly sensitive to the bond market, and has seen strong corrections during the last four events when it diverged from rates.

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

A flurry of big deals in sectors from mining to storage brought relief to global traders after the slowest start to the year in two decades. The weekend and Monday brought to light more than $40 billion in potential transactions, 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 Haruhiko Kuroda’s successor at the helm of the central bank.

The text of this story is published from a wire agency feed without any modification. Only the headline has been changed.