Hawkish ‘Fedspeak’ Sinks US, LatAm Markets

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

📉 A bad day for Latin America:

Latin American stock markets fell after Federal Reserve Chairman Jerome Powell’s Friday speech in which he warned that the central bank’s restrictive policy is not yet over., and the region’s markets were affected by the increased risk aversion.

The sharpest falls were seen on the markets of the region’s two largest economies: Mexico and Brazil. The S&P/BMV IPC (MEXBOL) fell 0.95%, dragged down by the performance of the financial, health and communication services sectors.

Shares of Banco del Bajío (BBAJIOO), Grupo Financiero Banorte (GFNORTEO) and Volaris (VOLARA) saw the sharpest falls.

A Monex analysis highlighted that markets had some hope that the speech would open the door to a pause in rate hikes, so now “we are likely to have some volatility and risk aversion while financial variables reconcile with reality”.

In line with the losses on Wall Street, Brazil’s Ibovespa (IBOV) closed lower following Powell’s message that interest rates will remain high for longer.

The performance of the communication services, utilities and industrial sectors hit the performance of the main index of the region’s largest stock exchange by market capitalization.

Chile’s IPSA (IPSA) swung between losses and gains during the last hour of trading and in the end rose slightly, by 0.02%, however, the market mood was marked by heavy selling caused by Powell’s hawkish stance.

🗽 On Wall Street:

Stocks tumbled as Jerome Powell gave a clear message that rates will likely stay high for some time, throwing cold water on the idea of a Federal Reserve pivot that could jeopardize its war against inflation.

The rout deepened in afternoon New York trading, with the S&P 500 seeing its worst day since mid-June and the Nasdaq 100 tumbling over 4%. Major equity indexes dipped below their 100-day price averages, indicating the potential for more losses, according to some traders. Treasury two-year yields -- which are more sensitive to imminent policy moves -- rose alongside the dollar.

The S&P plunged 3.37%, the Dow Jones Industrial Averags 2.03% and the Nasdaq Composite (CCMPDL) 3.94%, the sharpest falls by the three indices since mid-June.

Hawkish Fedspeak grew louder in the last few weeks as financial conditions eased after a stock rally that began with short covering, restored $7 trillion to values -- and ironically was linked to dovish expectations. Another reason cited by traders for Friday’s plunge was the concern that restrictive policy will raise the odds of a recession next year.

To Cliff Hodge at Cornerstone Wealth, the Fed is going to remain aggressive at the expense of growth and traders should expect more volatility and tougher conditions for equities.

“Powell can’t come right out and say that the Fed is fine walking us right into recession in order to crush inflation, but that is what this messaging unequivocally implies,” said Hodge. “What does this mean for markets? Drastically reduces the chance of a soft landing and the bull case for new highs this year.”

The Fed Chief reiterated that another “unusually large” hike could be appropriate next month, though he stopped short of committing to one, adding that the decision will depend on incoming data. Several officials have emphasized the central bank is in no way done, with Kansas City Fed Chief Esther George noting that the destination of the federal funds rate may be higher than markets are currently priced for.

Futures contracts referencing the Fed’s September policy meeting showed roughly even odds of a half-point or three-quarter-point hike. The amount of additional tightening priced in for this year increased slightly, with traders seeing lower chances of rate cuts in 2023.

“Powell wants financial conditions to tighten further and wanted the market to know that the Fed is not ready to declare victory over inflation yet,” said Joe Gilbert, portfolio manager at Integrity Asset Management. “He also renounced any prospects of interest rate cuts soon. The market is repricing this prospect.”

Former US Treasury Secretary Lawrence Summers handed out some rare praise for the Fed saying Powell’s latest pledge to restrain inflation was a “statement of being resolute.” He said the policy maker “did what he needed to do” and that it was clear the Fed’s “overwhelming priority” is pulling back inflation from the fastest pace in four decades.

Investors are rushing out of stocks and bonds alike as they worry about the economic risks from the Fed pressing on with rate hikes, Bank of America Corp. strategists said in a note before Powell’s speech.

Global equity funds had outflows of $5.1 billion in the week through Aug. 24, with US stocks seeing their first redemptions in three weeks, according to a report from the bank, citing EPFR Global data. Rate-sensitive technology funds posted their largest exodus since November 2021, while high-yield bonds led redemptions of $800 million from global bond funds. About $600 million left gold.

Data Friday showed consumer spending rose less than expected as a key inflation metric turned negative. Meantime, consumer sentiment beat estimates, suggesting Americans are growing more optimistic as gas prices continue to drop.

On the currency markets, the Bloomberg Dollar Spot Index rose 0.5%, the euro fell 0.1% to $0.9965, the British pound fell 0.8% to $1.1738, and the Japanese yen fell 0.7% to 137.42 per dollar.

🔑 The day’s key events:

The downward trend in oil prices came to a halt as investors continue to weigh the possibility of OPEC and its allies intervening in the market.

Although the increase in interest rates could cool the US economy, during the week, Saudi Arabia’s Oil Minister Prince Abdulaziz bin Salman told Bloomberg that extreme volatility” and the lack of liquidity could lead the group of oil countries to act, weighed more heavily.

Where the effect of Powell’s speech was felt was in the cryptocurrency market, in the face of increased risk aversion produced by the Fed’s stance. Bitcoin (XBT) accumulated a drop of more than 3.5% on the day while Ethereum (XET) slid more than 8%.

“Powell’s admission that there will be pain before there is easing is pretty stark,” Josh Olszewicz, head of research at digital asset fund manager Valkyrie Investments, told Bloomberg.

🍝 For the dinner table debate

The Covid-19 vaccine is at the center of a fight between three health industry giants. This Friday, Moderna (MRNA) announced that it sued Pfizer (PFE) and BioNTech (BNTX) on the grounds that the technology they used in the vaccine against the virus infringes its patents.

According to Moderna’s statement, the companies infringed intellectual property protecting key elements of the messenger RNA vaccine.

The company added that it held patents on this type of technology between 2010 and 2016, but that the other companies copied it without permission.

“We filed these lawsuits to protect the innovative mRNA technology platform that we pioneered, invested billions of dollars in and patented during the decade leading up to the Covid-19″ pandemic, Moderna CEO Stephane Bancel said in a statement seen by Bloomberg.

-- Carlos Rodríguez Salcedo, a content producer at Bloomberg Línea, and Rita Nazareth of Bloomberg News, contributed to this report.