(Bloomberg) – Stocks posted their worst day since the August 5 market meltdown, with the S&P 500 falling more than 2%, as growth and monetary concerns combined to fuel risky assets like they did a month earlier.
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As in the August episode, tech got the hardest hit, with Nvidia Corp driving a plunge in chipmakers. And the parallels don’t stop there. If it jumped, closely watched manufacturing measures again missed forecasts, and oil fell on worries about global demand. Wall Street’s “fear gauge” — the VIX — is rising. Treasury yields fell, with traders keeping bets on an unusually large half-point Federal Reserve rate cut this year.
The S&P 500 and Nasdaq 100 experienced their worst start to September since 2015 and 2002. With inflation expectations high, attention has shifted to the health of the economy as signs of weakness could accelerate policy easing. While rate cuts tend to be a good sign for equities, they usually don’t happen when the Fed is rushing to stave off a recession.
Traders expect the Fed to cut rates by more than two percentage points over the next 12 months, which would be the biggest outside decline since the 1980s. The trepidation regarding the recent rise in unemployment will leave traders “on edge” until there are payrolls data, said Ian Lyngen and Vail Hartman at BMO Capital Markets.
“This week’s jobs report, while not the only determinant, will be a key factor in the Fed’s decision between a 25 or 50 basis point cut,” said Jason Pride and Michael Reynolds at Glenmede. “Even a modest signal in this week’s jobs report could be an important decision point on whether the Fed takes a more cautious or aggressive approach.”
The S&P 500 fell to around 5,530. Small-cap Nasdaq 100 and Russell 2000 lost more than 3%. The Dow Jones Industrial Average fell 1.5%. The $22 billion VanEck Semiconductor ETF suffered its biggest decline since March 2020. Nvidia fell 9.5%, wiping out $279 billion in a record one-day write-off for American companies. The US Department of Justice has sent subpoenas to Nvidia and other companies as it seeks evidence that the chipmaker violated antitrust laws.
The 10-year Treasury yield fell seven basis points to 3.84%. Some blue-chip companies listed on the corporate bond market, taking advantage of cheaper debt. If the governor of the Bank of Japan Kazuo Ueda again, the central bank will continue to raise rates if the economy and prices do as expected.
A Morgan Stanley strategist who predicted a market correction last month said companies that had been lagging the rally in US stocks could get a boost if Friday’s jobs data provided evidence of a resilient economy. The stronger-than-expected payrolls numbers will give investors “greater confidence that growth risks have abated,” wrote Michael Wilson.
The equity-market rally could stall near record highs even as the Fed begins its highly anticipated rate-cutting cycle, JPMorgan Chase & Co. strategists said. The team led by Mislav Matejka noted that any policy easing would be in response to slowing growth, making it a “reactive” reduction.
“We are not out of the woods yet,” Matejka wrote in a note, reiterating his preference for the defense sector against the backdrop of a pullback in bond yields. “Sentiment and position indicators appear to be far from interesting political and geopolitical uncertainty, and seasonality is more challenging again in September.”
September was the biggest percentage point for the S&P 500 since 1950, according to the Stock Trader’s Almanac. Bank of America Corp’s contrarian sentiment gauge rose to its highest level in nearly two and a half years – creeping closer to a “sell” signal for US stocks.
“For all the years since World War II, August and September saw the S&P 500 suffer a double dose of decline,” said Sam Stovall at CFRA. “However, history now advises investors to tighten their seat belts, as during election years, this sequential seasonal slippage has shifted to September and October.”
For Callie Cox at Ritholtz Wealth Management, aside from the macro picture, there is also the fact that we are entering what is often a “miserable time” of the year for equities.
“When history is not the gospel, it is not crazy to think that this September can be particularly volatile,” Cox noted. “But this is not the conclusion of decades of seasonal market data. Instead, your attention should be why this is a “buyable dip, because there are many reasons to be optimistic here.”
Among them, he mentioned: the growth of earnings, the Fed will begin to reduce the policy against the background of controlled inflation and the fact that investors are sitting on piles of cash “that can be returned to stocks.”
“The key lesson from the past few weeks is that big tech stocks haven’t proven defensive in recent market pullbacks,” said Philip Straehl at Morningstar Wealth. “Although there is little evidence in AI spending, valuations have set a high bar for incoming corporate and macro data.”
Rich Ross at Evercore says the S&P 500 has had at least a 5% drawdown from its August/September high in nine of the last 10 years.
“This year should be no different after the end of August squeeze into resistance at an all-time high,” Ross noted. “The S&P has a strong downward bias that is only offset by defensive and ‘low volatility’ financials – which benefit from lower rates and a steeper curve.”
As investors weather a weak September, Ameriprise’s Anthony Saglimbene said the October-December period was the S&P 500’s strongest three-month stretch.
“In our view, investors should remain focused on using volatility to their advantage,” Saglimbene said. “Importantly, rely on time-tested dollar cost averaging strategies and portfolio diversification to weather the bigger push later in the year.”
Marking the start of a busy week for economic data, reports showed US manufacturing activity shrank in August for a fifth straight month.
On Friday, the August jobs report is expected to show payrolls in the world’s largest economy increased by about 165,000, based on the median estimate in a Bloomberg survey of economists.
While above the 114,000 gain in July, the average salary growth in the most recent three months will be less than 150,000 – the smallest since the beginning of 2021. The unemployment rate may have decreased in August, to 4.2% from 4.3%.
While the Fed will eventually cut rates, it’s not as likely as a 25-basis-point rate cut that they’ll take, says Neil Dutta at Renaissance Macro Research. In that scenario, it will take a long time to return the funds rate to neutral and in the process, you will remain policy constrained, remaining open to downside risk for growth.
“That muddling scenario will probably increase the risk of unemployment. So, if it’s not going to be 50 in September, it should be 50 at some point by the end of this year,” he said.
US interest rate strategists predict a bigger market reaction if August employment data comes in weaker than anticipated, according to a limited number of weekly research reports published over the holiday weekend.
“With the Fed likely to start a cycle of rate cuts in September, investors should consider extending the current period in the quality of fixed income to take potential benefits,” according to Principal Asset Management.
Company Highlights:
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Boeing Co. slumped as Wells Fargo & Co.
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Vice President Kamala Harris joined President Joe Biden to announce that United States Steel Corp. must remain domestically owned and operated, which is the latest challenge to the company’s sale to Japan-based Nippon Steel Corp.
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Deutsche Bank AG dropped JPMorgan Chase & Co.’s recommendation. to hold back from buying, while upgrading Bank of America Corp. and Wells Fargo & Co. to change preferences in the banking sector.
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The German government plans to cut its stake in Commerzbank AG as it seizes a new share general meeting to begin an exit from the lender that was bailed out more than a decade ago.
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Acquisition of cancer detection provider Grail Inc. blocked by Illumina Inc., Grail Inc., should never have been investigated by the European Union, according to a top court ruling that undermined EU efforts to scrutinize other global deals.
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Inspection of Cathay Pacific Airways Ltd. for the Airbus SE A350 fleet is focused on defective or damaged fuel lines in the widebody aircraft’s engines, after the discovery of the problem led to several flight cancellations while engineers switched components.
This week’s highlights:
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China Caixin services PMI, Wednesday
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Eurozone HCOB services PMI, PPI, Wednesday
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Canadian tariff decision, Wednesday
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US jobs, factory orders, Beige Book, Wednesday
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Eurozone retail sales on Thursday
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US initial jobless claims, ADP employment, ISM services index, Thursday
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Euro Zone GDP, Friday
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US nonfarm payrolls, Friday
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Fed’s John Williams said, there
Some of the main movements in the market:
Savings
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The S&P 500 fell 2.1% at 4 p.m. New York time
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Nasdaq 100 down 3.1%
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Dow Jones Industrial Average down 1.5%
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MSCI World Index fell 1.7%
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Bloomberg Magnificent 7 Total Return Index down 3.4%
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Philadelphia Stock Exchange Semiconductor Index down 7.8%
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Russell 2000 index down 3.1%
currency
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Bloomberg Dollar Spot Index rose 0.1%
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The euro fell 0.3% to $1.1042
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The British pound fell 0.3% to $1.3109
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The Japanese yen rose 0.9% to 145.64 per dollar
Cryptocurrencies
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Bitcoin fell 1.6% to $58,072.73
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Ether fell 4% to $2,451.58
Bond
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The yield on 10-year Treasuries declined seven basis points to 3.84%
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Germany’s 10-year yield fell 6 basis points to 2.28%
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Britain’s 10-year yield fell six basis points to 3.99%
Commodity
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West Texas Intermediate crude fell 4.4% to $70.31 a barrel
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Spot gold fell 0.3% to $2,491.71 an ounce
This story was produced with the help of Bloomberg Automation.
–With the help of Lu Wang.
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