Fed’s Hawkish Stance Sinks US, LatAm Markets

Stock markets across the Americas closed with losses on Friday amid hints the Federal Reserve will raise interest rates further

Federal Reserve Bank of Kansas City's president Esther George says the rate-hike debate must include balance sheet
By Bloomberg Línea and Bloomberg News
August 19, 2022 | 07:40 PM

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A roundup of Friday’s stock market results from across the region

📉 A bad day for the Americas:

The risk aversion generated by the fall of the US stock markets impacted the performance of Latin American markets, which ended the week with a day of losses.

The biggest setback occurred in Brazil, where the Ibovespa (IBOV) fell by more than 2%, dragged down by the performance of the energy, industrial and information technology sectors.

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Shares of Locaweb (LWSA3), Azul (AZUL4) and Gol (GOLL4) saw the sharpest losses during the day, while Petrobras shares (PETR3, PETR4) also closed lower.

Mexico’s stock market completed its third consecutive day of losses. The non-core consumer products, industrials and materials sectors weighed on the S&P/BMV IPC (MEXBOL).

“The most important catalyst of the session was the comments made yesterday by some members of the Fed, who still maintain a tight tone,” analysts at Bx+ wrote in a note.

🗽 On Wall Street:

Stocks fell in a decisive pivot that snapped the longest weekly rally since November, as short-sellers resurfaced and investors turned cautious after Federal Reserve officials beat the drum on hiking rates. Treasury yields climbed, while the dollar capped its best week since April 2020.

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The S&P 500 Index notched its biggest daily decline since June, sending the benchmark to its first weekly loss in five weeks. The tech-heavy Nasdaq 100 underperformed major benchmarks, with growth-related stocks among the hardest hit Friday. Meanwhile, Wall Street’s fear gauge, the Cboe Volatility Index, jumped the most in more than two weeks, back above 20.

The S&P 500 slid 1.29%, the Dow Jones Industrial Average slipped 0.86% and the Nasdaq Composite (CCMPDL) dropped .,01%.

Expiration of $2 trillion in options, obliging investors to either roll over existing positions or start new ones, set the stage for a volatile session as failure to break a key threshold for the S&P 500 around 4,300 appeared to open the door to selling positions. And bears pounced. A basket of the most-shorted stocks dropped more than 6%, extending its weekly loss to 12% and giving short sellers their best week since March 2020.

In a blow to individual investors, high-flying meme stock Bed Bath & Beyond tumbled more than 40% after Ryan Cohen sold his entire stake in the retailer. Cryptocurrency-linked stocks tumbled, tracking losses in Bitcoin: Coinbase Global Inc., Marathon Digital Holdings and Riot Blockchain Inc. each dropped more than 10%. Bitcoin sank back below $21,500 apiece.

One bright spot in the equity space was Occidental Petroleum Corp., rallying the most since March on news that Warren Buffett’s Berkshire Hathaway Inc. won approval from US regulators to buy as much as 50% in the oil company.

Against a backdrop of fear and volatility, the dollar marched higher for a third day in a row. Treasuries fell, with the two-year Treasury yield, the most sensitive to policy changes, jumping 4 basis points.

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Ahead of the Fed’s Jackson Hole gathering next week, officials reiterated their resolve to raise rates to curb stubbornly high inflation. In comments Thursday, two voting members of the Federal Open Market Committee -- St. Louis’s James Bullard and Kansas City’s Esther George --  stood firm on the need to hike rates, though they diverged on the size of the September move. Richmond’s Thomas Barkin echoed that resolve on Friday, noting the risk those efforts could cause a recession.

“Fighting the Fed is not a good policy at this juncture,” Jose Torres, senior economist at Interactive Brokers, said in an interview. “If you didn’t fight the Fed while they were engaging in quantitative easing and they boosted asset prices, why would you fight the Fed now when they’re engaging in the opposite. The same way we got a really violent summer bear-market rally, you can have those moves exacerbated the other way, particularly as liquidity conditions tighten.”

The pullback in equities this week follows a rally that has propelled the S&P 500 up more the 15% from its mid-June nadir amid speculation that the Fed may scale back its aggressive path of rate hikes. And a force that contributed to the rally is now showing signs of fatigue, with hedge funds dialing down purchases of shares.

Other Fed officials joined the chorus of a hawkish stance in the runup to the annual symposium at Jackson Hole Aug. 25-27. San Francisco’s Mary Daly pushed back against bets for rate cuts before the end of 2023 and Minneapolis’s Neel Kashkari said that “we have an inflation problem right now,” and that the central bank has to get it down “urgently.”

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“We think the Fed is likely to put an exclamation point on any premature notion that easing is in the cards, and we think they might do that with more hawkish commentary,” Leo Grohowski, CIO at BNY Wealth Management, said by phone. “There’s been a big change in sentiment and perhaps a little bit too much complacency here built in the short term.”

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“Markets have been rallying on the back of three assumptions: a moderated recession-to-come, a Fed pivot and an earnings expansion: from that perspective, this week has been sobering with notably a negative macro news flow,” Florian Ielpo, head of macro research at Lombard Odier Asset Management, wrote. “This week, we have seen a pause in this bear market rally which has not yet mutated into a turning point. The macro-heavy next two weeks should bring about more clarity in this matter.”

On the currency markets, the Bloomberg Dollar Spot Index rose 0.5%, the euro fell 0.5% to $1.0041, the British pound fell 0.8% to $1.1832, and the Japanese yen fell 0.7% to 136.78 per dollar.

🔑 The day’s key events:

Despite a slight rebound on Friday, oil prices accumulated a weekly loss of close to 1.5% as fears of an economic slowdown continue to impact investor sentiment.

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The possibility of slower growth hitting the market outweighed signs from the U.S. that demand remains robust.

In addition, progress in negotiations for a nuclear deal with Iran also affected performance. This “remains another potential negative for prices given the possibility that a large amount of crude will hit the market relatively soon,” said Craig Erlam, analyst at Oanda.

Separately, statements from Fed officials also weighed on the cryptocurrency market. Bitcoin (XBT) retreated 9.2%, its sharpest fall since June 18, according to Bloomberg.

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“Bitcoin is a speculative asset and speculative assets don’t perform well during tightening regimes, when the central bank is tightening and liquidity is becoming scarce,” Jose Torres, senior economist at Interactive Brokers, said in an interview with Bloomberg.

🍝 For the dinner table debate:

Prosus, a Dutch investment group, now owns Brazilian delivery giant iFood, after it bought a 33% stake in the company in a US$1.8 billion transaction. The move values the company at $5.4 billion, narrowly edging out direct rival Rappi.

Colombia’s Rappi is valued at $5.25 billion after a $500 million funding round in July 2021, according to data provider PitchBook.

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In addition, the transaction makes iFood the most valuable startup in Brazil and one of the most valuable in Latin America, behind only Mexico’s Kavak, which has a valuation of $8.7 billion.

iFood owns Colombian delivery firm Domicilios.com. “Increasing our stake to full ownership is a demonstration of our committed and disciplined investment approach and reflects our confidence in iFood’s long-term potential,” said Prosus CEO Bob van Dijk.

-- Carlos Rodríguez Salcedo, a content producer at Bloomberg Línea, and Stephen Kirkland and Vildana Hajric of Bloomberg News, contributed to this report.