Dow plunges again, UK markets collapse in broad rout

Goldman slashed its year-end target for the S&P 500 to 3600 from 4300, which it had made in mid-August. “The expected path of interest rates is now higher than we previously assumed, which tilts the distribution of equity market outcomes below our prior forecast.”

“Based on our client discussions, a majority of equity investors have adopted the view that a hard landing scenario is inevitable and their focus is on the timing, magnitude, and duration of a potential recession and investment strategies for that outlook.”

New ‘new’ normal

Federal Reserve chairman Jerome Powell said the US economy may be entering a “new normal” following disruptions from the COVID-19 pandemic.

“We continue to deal with an exceptionally unusual set of disruptions,” Powell told business and community leaders at a Fed Listens event in Washington.

LPL Financial’s Quincy Krosby said: “What looks like the proverbial ‘sell now and ask questions later’ downdraft in today’s market is just that: raise cash as uncertainty and volatility climbs.

“Market levels from the Dow to the S&P 500, and over to the NASDAQ, look as though they want to head lower to find that spot where all headwinds are discounted.”

Concern about the US economic outlook, already darkened by this week’s revised Federal Reserve projections, was exacerbated by a shock budget from the new UK government.

Former Treasury Secretary Lawrence Summers blasted the economic policies being adopted by newly installed UK Prime Minister Liz Truss.

“It makes me very sorry to say, but I think the UK is behaving a bit like an emerging market turning itself into a submerging market,” Summers told Bloomberg.

“Between Brexit, how far the Bank of England got behind the curve and now these fiscal policies, I think Britain will be remembered for having pursued the worst macroeconomic policies of any major country in a long time.”

Gilt yields surge

Ten-year gilt yields recorded their biggest one-day surge on record in Bloomberg data through 1989, closing 33 basis points higher on the day at 3.83 per cent. The FTSE 100 Index sank 2 per cent.

While the US 10-year yield eased 3 basis points to 3.68 per cent at 4.29pm in New York, the two-year was at 4.19 per cent.

The Australian dollar briefly fell below US65.25¢; the Bloomberg dollar spot index reset its record high and was up 1.3 per cent near 4.15pm in New York.

“We can expect continued market turbulence for some time,” said Brad McMillan, chief investment officer for Commonwealth Financial Network.

Fundstrat Global’s Mark Newton said: “There are no signs of reversals just yet to give confidence, but multiple negative breadth days combined with poor sentiment and upcoming cyclical turns suggests trading lows are near.”

“The economy is already in a growth recession,” wrote Ed Yardeni in a note. “The yield curve spread has been negative for several weeks, signaling an outright recession. The odds of such an outcome have increased now that Fed officials seem to have concluded that’s the only way to bring inflation down.”

Market highlights

ASX futures down 82 points or 1.25% to 6478 near 6.15am AEST

  • AUD -1.7% to 65.30 US cents
  • Bitcoin -1.9% to $US18,916 near 6.15am AEST
  • On Wall St: Dow -1.6% S&P 500 -1.7% Nasdaq -1.8%
  • In New York: BHP -4.6% Rio -5.8% Atlassian -1.4%
  • Tesla -4.6% Apple -1.5% Amazon -3% Chevron -6.5%
  • In Europe: Stoxx 50 -2.3% FTSE -2% CAC -2.3% DAX -2%
  • Spot gold -1.6% to $US1644.42/oz at 2.09pm New York time
  • Brent crude -5% to $US85.92 a barrel
  • Iron ore +0.8% to $US99.60 a tonne
  • 10-year yield: US 3.68% Australia 3.90% Germany 2.02%
  • US prices as of 4.29pm in New York

United States

The latest rout in US stocks took the S&P 500 below its June bear-market low — and then some buyers showed up.

The S&P 500 fell as much as 2.5 per cent to 3663 around 12.30pm in New York. It’s fluctuated just a few points above that level since, as programmed buys halted the decline, at least temporarily.

Traders who watch charts for signs of where the drop might ease have identified the June low as a potential area for support. A close below that level would wipe out all gains since the end of 2020.

While investors used to be positioned as if the economy was headed for a soft landing, that’s no longer the case, according to Anastasia Amoroso, chief investment strategist at iCapital.

“What the markets really need to do is price in a recession because it seems like that’s what a weakness in the labor market would ultimately cost,” she said on Bloomberg TV this week.

The market has been trading in a 3700-3800 to 4300 range for a while now, she said.

“We may need to see a break below the bottom of that trading range to really find dirt-cheap value in equities,” Amoroso said. “We’re just not there yet, so the trade for now is to actually be defensive and to get paid while you wait for this bottom in the market.”

Europe

UK’s FTSE 100 hit three-month closing lows on Friday after Britain’s new finance minister Kwasi Kwarteng unveiled historic tax cuts and spending plans to boost the economy, but knocked market sentiment as investor concerns grew over a huge increase in borrowing.

Kwarteng announced an economic agenda designed to push Britain out of a cycle of stagnation and into a new era of higher economic growth – but with a hefty bill attached.

The internationally focused FTSE 100 closed down 2.0 per cent at its lowest level since June 17. The index fell as much as 2.5 per cent to hit a six-month trough earlier in the session.

The domestically focused FTSE 250 index also dropped 2.0 per cent to hit near two-year lows.

A survey showed the downturn in British businesses steepened this month as they battled soaring costs and faltering demand, hammering home the rising risk of recession.

“We’re very cautious about cyclical equities. We need to see PMI get to trough levels rather than the downward trajectory that we’re on at the moment,” said Roger Jones, head of equities at London & Capital.

Data earlier showed British consumer confidence slid this month to its lowest level since records began in the mid-1970s.

Oil and mining majors were the biggest drags on the FTSE 100 as commodity prices weakened against a strong dollar.

Among single stocks, Burberry fell 4.6 per cent after the luxury group said Chief Financial Officer Julie Brown was planning to step down in April.

Commodities

Gold headed for a second weekly decline after a slew of central banks followed the Federal Reserve in raising interest rates to cool inflation.

Bullion slipped to the lowest in more than two years on Friday as the dollar climbed to a record.

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