Overnight Market Wrap: 1 November 2022

Overnight Market Wrap: 1 November 2022

Key Points:

  • Stocks Trim Big October Rally as Bond Yields Climb
  • Biden to urge congress to consider tax penalties on oil firms

Stocks pared their monthly surge as bond yields climbed, with investors awaiting Wednesday’s Federal Reserve decision for clues on whether officials will dial back the pace of rate hikes as early as December.

Big tech weighed heavily on the S&P 500, while energy shares whipsawed on news that President Joe Biden will call on Congress to consider tax penalties for producers accruing record profits. Equities may also have come under pressure as pension funds that rebalance on a monthly basis potentially dumped shares amid an 8% rally for the US benchmark gauge in October.

A selloff in bonds across the curve sent two-year US yields to around 4.5%. Swap markets are pricing in a 75-basis-point hike this week amid the Fed’s most-aggressive tightening campaign in four decades. The outlook for the following meetings is less certain, with traders seeing a “coin toss” between an increase of that size and a 50-basis-point boost in the final month of 2022.

“This week will be loaded with scary stuff, from the Fed meeting and press conference to employment data on Friday,” wrote Paul Nolte, portfolio manager at Kingsview Investment Management. “Market expectations are for the Fed to begin signaling that their very aggressive rate hiking cycle will begin slowing down.”

To Jason Draho at UBS Global Wealth Management, while the recent rally in stocks didn’t really look sustainable, that doesn’t mean markets can’t keep grinding higher in coming weeks, “provided that the Fed and labor and inflation data don’t disappoint.”

Global economic reports didn’t help sentiment on Monday. Euro-area inflation surged to a fresh all-time high, while the bloc’s economy lost momentum — reinforcing fears that a recession is now all-but unavoidable. China’s factory and service activity contracted in October, with signs that things could worsen in the coming months.

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