(Bloomberg) — Stocks posted their worst day since the Aug. 5 market crash, with the S&P 500 down more than 2% as the combination of growth and monetary worries set risky assets on fire, just as it did a month earlier.
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As in the August episode, technology was hit hardest, with Nvidia Corp. caused a dip in the chip makers. And the parallels don’t end there. The yen jumped, a closely watched production gauge again missed forecasts, and oil tumbled on concerns about tepid global demand. Wall Street’s “fear meter” – the VIX – skyrocketed. Treasury yields tumbled as traders maintained their bets on an unusually large half-point Federal Reserve rate cut this year.
The S&P 500 and Nasdaq 100 had their worst starts to September since 2015 and 2002, respectively. With inflation expectations anchored, attention has shifted to the health of the economy as signs of weakness could accelerate policy easing. While rate cuts often bode well for stocks, that’s typically not the case when the Fed is rushing to prevent a recession.
Traders expect the Fed to cut rates by more than two percentage points over the next 12 months – the sharpest decline outside a recession since the 1980s. Unrest following the latest rise in unemployment will put traders “on edge” until Friday’s payrolls data, said Ian Lyngen and Vail Hartman of BMO Capital Markets.
“While this week’s jobs report won’t be the sole determining factor, it will likely be a key factor in the Fed’s decision between a 25 or 50 basis point cut,” said Jason Pride and Michael Reynolds of Glenmede. “Even modest signals in this week’s jobs report could be a key decision point on whether the Fed will take a more cautious or aggressive approach.”
The S&P 500 fell to about 5,530 points. The Nasdaq 100 and the Russell 2000 each lost more than 3%. The Dow Jones Industrial Average fell 1.5%. The $22 billion VanEck Semiconductor ETF saw its biggest plunge since March 2020. Nvidia plunged 9.5%, losing $279 billion in a record one-day loss for a U.S. stock. The U.S. Department of Justice has sent subpoenas to Nvidia and other companies as it seeks evidence that the chipmaker violated antitrust laws.
The US ten-year yield fell by seven basis points to 3.84%. A record number of large companies tapped into the corporate bond market and took advantage of cheaper loans. The yen rose as Kazuo Ueda of the Bank of Japan reiterated that the central bank will continue to raise interest rates if the economy and prices perform as expected.
The Morgan Stanley strategist who foresaw last month’s market correction says companies that have lagged behind the rally in U.S. stocks could get a boost if Friday’s jobs data provides evidence of a resilient economy. A stronger-than-expected payroll figure would likely give investors “more confidence that growth risks have diminished,” Michael Wilson wrote.
The stock market rally could stall near record highs even if the Fed begins a long-awaited rate-cutting cycle, JPMorgan Chase & Co. strategists said. earlier this week. The team led by Mislav Matejka noted that any policy easing would be a 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 defensive sectors against the backdrop of a decline in bond yields. “Sentiment and positioning indicators look far from attractive, political and geopolitical uncertainty is high and seasonal effects are more challenging again in September.”
According to the Stock Trader’s Almanac, September is the biggest percentage loser for the S&P 500 since 1950. A contrarian sentiment gauge from Bank of America Corp. rose to the highest level in almost two and a half years last month – moving closer to a sell signal for US stocks.
According to Callie Cox of Ritholtz Wealth Management, in addition to the macro picture, there is also the fact that we are entering an often ‘miserable time’ of the year for equities.
“While history is not gospel, it is not crazy to think that this month of September could be particularly volatile,” Cox noted. “But this is not the conclusion you can draw from decades of seasonal market data. Instead, your focus should be on why this is a ‘buyable dip’, because there are many reasons to be optimistic.
She mentioned, among other things, earnings growth, the Fed that is about to ease policy against the backdrop of controlled inflation and the fact that investors are sitting on a huge pile of money “that could end up back in equities.”
“A key lesson from the past few weeks is that big tech stocks have not proven defensive during the recent market pullbacks,” said Philip Straehl of Morningstar Wealth. “While there is little evidence of a slowdown in AI spending, valuations have set the bar high for incoming corporate and macro data.”
Evercore’s Rich Ross says the S&P 500 has fallen at least 5% from its August/September highs in nine of the past 10 years.
“This year should be no different after resistance rose to a record high in late August,” Ross noted. “The S&P has a strong downward bias, supported only by a preference for defensive and low-volatility financials – which benefit from lower interest rates and steeper curves.”
As investors navigate the historically weak September, Ameriprise’s Anthony Saglimbene noted that the October-December period is the S&P 500’s strongest three-month period.
“In our view, investors should continue to focus on using volatility to their advantage,” Saglimbene said. “It’s important that you rely on proven dollar-cost averaging and portfolio diversification strategies to weather a potentially bumpier push into year-end.”
A report marking the start of a busy week for economic data showed US manufacturing activity contracted for a fifth month in August.
This Friday, the August jobs report is expected to show that payrolls in the world’s largest economy rose by about 165,000, based on the average estimate in a Bloomberg survey of economists.
While average wage growth in July would be above the modest increase of 114,000 in July, average wage growth over the past three months would slow to just over 150,000 – the lowest since early 2021. The unemployment rate is likely to have fallen from 4.3 in August % to 4.2%. .
While the Fed may finally cut rates, it doesn’t feel like a series of 25 basis point rate cuts will be enough, says Neil Dutta of Renaissance Macro Research. In that scenario, it will take a long time for the funds rate to return to neutral, and policy will remain restrictive, leaving open downside risks to growth.
“This muddling through scenario will likely lead to a further increase in unemployment. So if they don’t turn 50 in September, they will have to turn 50 sometime later this year,” he concludes.
Business highlights:
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Boeing Co. collapsed when Wells Fargo & Co. the aircraft maker cut to a sell-equivalent rating, saying it is difficult to see any upside in the shares.
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Vice President Kamala Harris joined President Joe Biden in declaring that United States Steel Corp. must remain in-house, the latest headwind for the company’s proposed sale to Japan-based Nippon Steel Corp.
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Deutsche Bank AG lowered its recommendation to JPMorgan Chase & Co. not to buy, while Bank of America Corp. and Wells Fargo & Co. were upgraded due to changing preferences within the banking sector.
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The German government plans to cut its stake in Commerzbank AG as it uses a recent stock rally to initiate an exit from the lender it rescued more than a decade ago.
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Illumina Inc.’s blocked $7 billion takeover of cancer detection supplier Grail Inc. should never have been investigated by the European Union, according to a Supreme Court ruling that undermines the EU’s bid to investigate more global deals.
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The inspection of Cathay Pacific Airways Ltd. of its Airbus SE A350 fleet is targeting deformed or defective fuel lines in the widebody aircraft’s engines, after the discovery of the problem caused multiple flight cancellations as engineers swapped parts.
Main events this week:
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China Caixin serves PMI, Wednesday
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Eurozone HCOB delivers PMI, PPI on Wednesday
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Tariff decision Canada, Wednesday
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US Jobs, Factory Orders, Beige Book, Wednesday
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Eurozone retail sales, Thursday
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First U.S. unemployment claims, ADP employment, ISM services index, Thursday
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Eurozone GDP, Friday
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U.S. Nonfarm Payrolls, Friday
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John Williams of the Fed will speak on Friday
Some of the major moves in the markets:
Stocks
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The S&P 500 was down 2.1% as of 4 p.m. New York time
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The Nasdaq 100 fell 3.1%
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The Dow Jones Industrial Average fell 1.5%
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The MSCI World Index fell 1.7%
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Bloomberg Magnificent 7 Total Return Index fell 3.4%
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Philadelphia Stock Exchange Semiconductor Index fell 7.8%
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The Russell 2000 Index fell 3.1%
Currencies
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The 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
Bonds
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The yield on ten-year government bonds fell by seven basis points to 3.84%
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The German ten-year yield fell by six basis points to 2.28%
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The British ten-year yield fell by six basis points to 3.99%
Raw materials
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West Texas Intermediate crude fell 4.4% to $70.31 a barrel
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Gold fell 0.3% to $2,491.71 an ounce
This story was produced with the help of Bloomberg Automation.
–With help from Lu Wang.
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