Latin American, US Markets Fall Amid Slower Growth Fears

Markets across the region closed lower on Tuesday amid risk aversion generated by fears of slower growth

Wall Street subway station, New York City
By Bloomberg Línea and Bloomberg News
September 06, 2022 | 08:45 PM

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

📉 A bad day for Latin America:

Risk aversion hit Latin American stock markets and the main markets in the region fell after the increases with which they had started the week. Chile’s IPSA (IPSA) registered the sharpest fall, after two consecutive days of gains, in which it reached its highest daily increase since November 2021.

The index closed with a drop of close to 3% amid the profit taking that investors took advantage of.

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In addition, the market is now awaiting the next chapter of the process for the next Constitution after Sunday’s rejection by voters in the mandatory plebiscite, and President Gabriel Boric on Tuesday announced changes to his cabinet.

Brazil’s Ibovespa (IBOV) saw the second sharpest drop, not only affected by the international mood, but also by the statements made by the president of the central bank, Roberto Campos Neto., who warned that the bank could raise its interest rate at the next meeting in September, even though investors had taken it for granted that the monetary tightening cycle had already ended.

Mexico’s stock market also closed lower, the S&P/BMV IPC (MEXBOL) dragged down by the performance of the health, finance and industrial sectors.

🗽 On Wall Street:

Stocks trimmed losses from nearly oversold levels, while bond yields soared on bets the Federal Reserve will stay hawkish as it confronts the hottest inflation in about four decades.

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After exhausting gyrations, the S&P 500 managed to close slightly above 3,900 -- a threshold seen by some technical analysts as a make-or-break level for short-term direction. Treasuries tumbled across the curve, taking the 30-year rate to the highest since 2014. The Bloomberg Dollar Spot Index rose to another record, while the Japanese yen hit a fresh 24-year low.

The S&P 500 slipped 0.41%, the Dow Jones Industrial Average 0.55% and the Nasdaq Composite (CCMPDL) 0.74%.

“We continue to advise against big market direction calls,” said Solita Marcelli, chief investment officer Americas at UBS Global Wealth Management. “Investors should keep their asset allocations closer to their long-term strategic benchmarks. We also recommend incrementally tilting portfolios toward higher-quality and more defensive assets, which should hold up better across multiple scenarios.”

Hedge funds have raised exposure in back-to-back weeks, data from Goldman Sachs Group Inc.’s prime brokerage show, increasing short sales via macro products such as index futures while buying shares of individual firms. The data suggest that money managers are both keen to pick up bargains and leery about the broader market’s direction.

US shares have given up about half of a rally from their June lows after a raft of Fed speakers signaled the central bank will keep its policy tight. While the equity market should still remain in “choppy waters,” several indicators suggest the selling is getting overdone, according to Keith Lerner at Truist Advisory Services.

“Markets do not typically move in a straight line,” said Lerner. “Of course, oversold markets can get more oversold. Still, after advocating for trimming equities on strength, we would be less apt to do so now -- at least over the short term.”

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To Matt Maley at Miller Tabak + Co., any stock gains at this point should be seen as a short-term relief rally. He says traders should use those bounces as an opportunity to get more defensive.

Meantime, one of Wall Street’s biggest bears is turning even more pessimistic on the outlook for profits.

Morgan Stanley strategist Mike Wilson cut his expectations for earnings-per-share growth, saying that a slowing economy is now likely to be a bigger concern for stocks. In 2023, he expects profits to fall 3% -- even in the absence of an economic recession.

Investors are unwinding their equity positions as if a deep recession is already here. So say strategists at Deutsche Bank AG, who found that a historically strong link between discretionary investors’ equity exposure and the ISM manufacturing index is unwinding.

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Their current stock exposure stands at the bottom-10th percentile of historical observations after a sharp drop last week. Historically, that’s been consistent with an ISM print of 47, below the level of 50 that signals an economic contraction.

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Traders bracing for a recession jolt have recently accelerated their retreat from stocks, with global equity funds posting outflows of $9.4 billion in the week to Aug. 31 -- the fourth-largest redemptions this year, according to EPFR Global data cited by Bank of America Corp.

Amid rising borrowing costs, US companies extended a worldwide wave of issuance -- offering the largest amount of bonds in 12 months. The newfound urgency to raise debt is sparked by the potential for greater uncertainty -- and higher cost -- after this month’s meeting of the Federal Open Market Committee.

Data showing the US service sector expanded at the fastest pace in four months just reinforced trader bets on a still restrictive Fed policy.

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In the final week before officials enter a blackout period ahead of the Sept. 20-21 policy meeting, Fed Chair Jerome Powell leads a hefty lineup of central bankers offering their views. Their remarks will be weighed carefully for evidence of a tilt toward another 75 basis-point rate increase, or if there’s scope for the hiking pace to be dialed back.

“The Fed is going to do whatever it takes to get inflation under control,” said Gene Podkaminer, head of research at Franklin Templeton Investment Solutions. “If market participants don’t believe them, it’s probably at their own peril.”

On the currency markets, the Bloomberg Dollar Spot Index rose 0.5%, the euro fell 0.3% to $0.9903, the British pound was little changed at $1.1516 and the Japanese yen fell 1.6% to 142.82 per dollar.

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🔑 The day’s key events:

Oil prices retreated amid risk aversion generated by expectations of slower economic growth and new lockdowns announced by China to control an outbreak of Covid-19, in parts of Guiyang, the capital of Guizhou province, home to six million people.

The Guiyang lockdown comes as Chengdu, the capital of neighboring Sichuan province, extended a stay-at-home order for its 21 million residents until Wednesday, Bloomberg reported.

“Despite better-than-expected U.S. services data, global growth doesn’t look good at all and that’s a problem for crude prices,” said Edward Moya, senior markets analyst at Oanda.

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🍝 For the dinner table debate:

The main cryptocurrency exchanges announced the temporary suspension of deposits and withdrawals of Ethereum (ETH), and other crypto assets on Tuesday, during the implementation of the Bellatrix update.

This measure seeks to introduce changes to the network on which the digital token operates and will be essential for the deployment of the new Proof of Stake (PoS) protocol, based on transaction validator nodes.

The change will leave behind the mechanism that needs powerful computers, known as miners, to secure the network and obtain rewards in ether. The miners will be replaced by ‘valuators’, which are basically ether holders that carry out ‘staking’ of their coins, Bloomberg explained.

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In the face of the so-called merger, users don’t need to do anything else, as ETH will work the same as before, Coinbase said. “There will only be one Ethereum going forward, it is a mistake to think of Ethereum 2.0 as a new currency or asset of its own.”

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