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After $18 trillion on the run, global stocks face more hurdles in 2023

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(Bloomberg) — More tech tantrums. The spread of covid in china. Above all, there are no central banks to bail out if things go wrong. With $18 trillion wiped out, global equities must overcome all of these hurdles and more if they are to escape a second year in a row in the red.

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With a drop of more than 20% in 2022, the MSCI All-Country World Index is on track for its worst performance since the 2008 crisis, as massive interest rate hikes by the Federal Reserve more than doubled 10-year Treasury yields – the average Support global capital costs.

Bulls looking forward into 2023 may find solace in the fact that two consecutive years of decline are rare for major stock markets — the S&P 500 has fallen for two consecutive years on only four occasions since 1928. But the scary thing is that when they do happen, The drops in the second year tend to be deeper than they were in the first.

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Here are some of the factors that could determine how 2023 shapes up for global stock markets:

central banks

Optimists may point out that a peak in rate hikes is looming, perhaps in March, as money markets expect the Fed to shift into rate-cutting mode by the end of 2023. A Bloomberg News survey found that 71% of large global investors expect it will rise stocks in 2023.

Vincent Mortier, chief investment officer of Amundi, Europe’s largest financial manager, recommends putting investors on the defensive at the start of the new year. He expects a bumpy ride in 2023, but believes that “doing the Fed in the early part of the year could lead to interesting entry points.”

But after a year that stunned the best and brightest of the investment community, many are bracing for more reversals.

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One risk is that inflation remains too high for policymakers’ comfort and rate cuts do not materialize. A Bloomberg Economics model shows a 100% chance of a recession by August, yet it seems unlikely that central banks will rush to ease policy when faced with cracks in the economy, a strategy they have used repeatedly in the past decade.

“Policy makers, at least in the United States and Europe, now seem resigned to weak economic growth in 2023,” Christian Nolting, global chief investment officer at Deutsche Bank, told clients in a note. He warned that recessions may be short, but they “will not be pain-free”.

Major technical problems

The big unknown is how big tech companies fare, after a 35% drop in the Nasdaq 100 in 2022. Companies like Meta Platforms Inc. and Tesla Inc. about two-thirds of its value, while losses in Amazon.com Inc. and Netflix Inc. Approached or exceeded 50%.

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High-value technology stocks suffer the most when interest rates rise. But other trends that have supported technology advances in recent years may also be reversing — an economic recession threatens to hurt iPhone demand while a slump in online advertising could hit Meta Inc. and Alphabet Inc.

In an annual Bloomberg survey, only about half of respondents said they would buy the sector — selectively.

“Some tech names will come back because they’ve done a great job convincing customers to use them, like Amazon, but others will probably never reach that peak as people move on,” said Kim Forrest, chief investment officer at Bouquet Capital Partners. for Bloomberg Television.

Earnings slump

Previously resilient corporate earnings are widely expected to collapse in 2023, as pressure on margins builds and consumer demand weakens.

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“The final chapter of this bear market is all about the trajectory of earnings estimates, which are way too high,” said Mike Wilson of Morgan Stanley, a Wall Street bear who predicts earnings of $180 per share in 2023 for the S&P 500, versus analyst expectations. $231.

He said the next earnings recession could rival 2008, and markets have yet to price it in.

delicate china

Beijing’s decision in early December to dismantle tough Covid restrictions appeared to be a turning point for the MSCI China Index, whose 24% drop was a major contributor to global stock market losses in 2022.

But a month-long recovery in mainland and Hong Kong stocks faded as a surge in Covid-19 infections threatened the economic recovery. Many countries are now requiring Covid testing for travelers from China, which is a negative for global travel, leisure and luxury stocks.

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Boom options

Technical indicators are increasingly driving daily stock moves, with the S&P 500 seeing below-average turnover in 2022, but explosive growth in very short-term options trading.

Professional traders and algorithmic institutions have piled into such options, which until recently were controlled by small investors. That could lead to bumpier markets, causing sudden swings to flare up like the big intraday swing after the hot US inflation reading in October.

Finally, with the S&P 500 failing to break out of its 2022 downtrend, the short-term speculation continues to tilt to the downside. But should the market turn around, it will add fuel to the recovery.

— with assistance from Ryan Vlastelica and Ishika Mookerjee.

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Stock, bond and cryptocurrency investors remain on edge after a rough year for the markets

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This version is for personal, non-commercial use only. Distribution and use of this material is subject to our Subscriber Agreement and copyright law. For non-personal use or to order multiple copies, please contact Dow Jones Reprints at 1-800-843-0008 or visit www.djreprints.com.

https://www.wsj.com/articles/stock-bond-and-crypto-investors-remain-on-edge-after-brutal-year-for-markets-11672403124

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Dow Jones losses are heading towards the closing bell as US stocks approach their worst year since 2008

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US stocks were trimming losses heading towards the closing bell on Friday, but were still on track to post their worst annual loss since 2008, as the harvest of tax losses combined with concern over the outlook for US corporate and consumer earnings took its toll.

How are stock indices traded?
  • Dow Jones Industrial Average
    DJIA,
    -0.22%

    It fell about 182 points, or 0.6%, to 33,039 points.

  • S&P 500 index
    SPX,
    -0.25%

    It fell nearly 26 points, or 0.7%, to about 3,824.

  • The Nasdaq Composite Index fell 72 points, or 0.7%, to about 10,406 points.

Stocks posted their biggest gains of the month on Thursday, with the Dow Jones rising 345 points, or 1.05%, to 33,221 as major stock indexes rebounded after losses incurred earlier in the week that pushed the Nasdaq Composite to a new closing low for the year. . The S&P 500 was on track on Friday to wrap up its fourth consecutive losing week, the longest streak of weekly losses since May, according to FactSet data.

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What drives the markets

US stocks traded lower on Friday afternoon, on pace to close the last trading session of 2022 with weekly and monthly losses.

Stocks and bonds have been crushed this year as the Federal Reserve raised its benchmark interest rate more aggressively than many expected, as it sought to crush the worst inflation in four decades. The S&P 500 is on track to end the year with a loss of nearly 20%, its worst annual performance since 2008.

“Investors were on edge,” Mark Heppenstahl, chief investment officer at Penn Mutual Asset Management, said in a phone interview Friday. “It seems as if being able to bring prices down might be a little easier given how bad the year has been.”

Stock indices have fallen in recent weeks as the recent rally inspired by hopes in the Fed’s policy focus faded in December after the central bank indicated it would likely wait until 2024 to cut interest rates.

On the last day of the trading year, the markets were also hit by selling to capture losses that could be written off from tax bills, a practice known as tax harvesting, according to Kim Forrest, chief investment officer at Bouquet Capital Partners. .

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Forrest added that an uncertain outlook for 2023 has also weighed in, as investors worry about the strength of corporate earnings, the US economy and consumer as the fourth-quarter earnings season approaches early next year.

“I think the Fed, and then earnings in mid-January — they’ll set the tone for the next six months. Until then, it’s anyone’s guess.”

The US central bank has raised its benchmark interest rate by more than four percentage points since the start of the year, pushing borrowing costs to their highest levels since 2007.

The timing of the first Fed rate cut will likely have a significant impact on markets, according to Forrest, but the outlook remains uncertain, even as the Fed tries to signal that it plans to keep interest rates higher for longer.

On the economic data front, the Chicago PMI for December, the latest major data release for the year, Came stronger than expected. Climbing to 44.9 from 37.2 in the previous month. Readings below 50 indicate contraction.

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In the coming year, Heppenstahl said, “we are likely to shift toward concerns about economic growth rather than inflation.” “I think the decline in growth will eventually lead to an even greater drop in inflation.”

Read: Stock market investors face 3 recession scenarios in 2023

Eric Sterner, chief information officer at Apollon Wealth Management, said in a phone interview on Friday that he expects the US to fall into a recession next year and that the stock market could see a new bottom as companies likely review their earnings. “I think the earnings outlook for 2023 is still very high,” he said.

The Dow Jones Industrial Average, S&P 500 and Nasdaq Composite were all on pace Friday afternoon posting weekly losses of around 1%, according to FactSet data, at last check. For the month, the Dow was down about 5%, the S&P 500 was down about 7% and the Nasdaq was about to crash down about 10%.

Read: Value stocks are outperforming growth stocks in 2022 by a large margin historically

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As for bonds, Treasury yields rose on Friday as the US sovereign debt market was set to post its worst year since at least the 1970s.

The yield on the 10-year Treasury note
TMUBMUSD10Y,
3.879%

It rose about four basis points on Friday at 3.88%, according to FactSet data, in the latest check. Ten-year yields jumped about 2.34 percentage points this year through Thursday, on track for the biggest annual gain ever based on data going back to 1977, according to market data from Dow Jones.

Meanwhile, the yield on the two-year note
TMUBMUSD02Y,
4.423%

Up about 3.64 percentage points in 2022 through Thursday to 4.368%, 30-year return
TMUBMUSD30Y,
3.971%

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It jumped 2.03 percentage points over the same period to 3.922%. That marks the largest increase in a calendar year for each based on data going back to 1973, according to market data from Dow Jones.

Outside the US, European stocks capped their biggest percentage drop in a calendar year since 2018, with the Stoxx Europe 600
xxxp,
-1.27%
And the
It is an index of euro-denominated stocks, down 12.9%, according to market data from Dow Jones.

Read: A downturn in the US stock market is trailing these international ETFs as 2022 draws to a close

Companies in focus

Steve Goldstein contributed to this article.

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Fed’s reverse repo facility reaches $2.554 trillion by Reuters

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© Reuters. FILE PHOTO: The Federal Reserve Building in Washington, US, January 26, 2022. (Reuters)/Joshua Roberts/File Photo

Written by Michael S Derby

NEW YORK (Reuters) – A key facility used by the Federal Reserve to help control short-term interest rates saw record inflows on Friday, the last trading day of the year.

The New York Fed said its reverse repo facility took in $2.554 trillion in cash from money market funds and other eligible financial firms, beating the previous high seen on Sept. 30, when inflows totaled $2.426 trillion.

The cash rally was almost certainly tipping into record territory in the usual end-of-quarter pattern that could worsen further towards the end of the year. On those dates, for a variety of reasons, many financial firms prefer to deposit money in the central bank rather than in the private markets.

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The Fed’s reverse repo facility has been very active for some time. After seeing almost no absorption for a long time, money began to gravitate toward the central bank in the spring of 2021 and then grew steadily. Daily reverse repo usage has been steadily above the $2 trillion mark since June.

The reverse repo facility takes cash from qualified financial firms in what is an actual loan from the Federal Reserve. The current rate is 4.3%, a yield that is often better than rates for short-term private sector lending.

The reverse repo facility is designed to provide a soft floor for short-term rates and the federal funds target rate, and is the Fed’s primary tool for achieving its function and inflationary mandates. To mark the higher end of the range, the Fed is also pushing deposit-taking banks to deposit cash at the central bank, where the interest rate on reserve balances is now 4.4%.

The federal funds rate is currently set between 4.25% and 4.5% and is trading at 4.33% as of Friday, sandwiched between the reverse repo rate and interest on reserve balances.

There are no signs of shrinkage

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Even with the heavy use of reverse repo, Fed officials have always remained unconcerned about large outflows, even as some in financial markets worried about the potential for the Fed to drain the borrowing and lending lives of private money markets.

Fed officials also expected that as the central bank continues to raise interest rates with the goal of bringing down very high levels of inflation, the use of the reverse repo facility should decrease. But that hasn’t happened yet, and some in the markets now believe that the consistently high utilization of the Fed facility will be around for some time to come.

Research by the Federal Reserve Bank of New York indicated that banking regulation issues make demand for the Fed’s reverse repo instrument high. Meanwhile, the Kansas City Fed added its view that large inflows are related to limited private market investment opportunities and policy uncertainty.

Strong cash flows to the central bank may not have alarmed central banks, but they have driven their operations to an actual loss. The Federal Reserve finances itself through interest on the bonds it owns as well as the services it provides to the financial community. It usually makes a noticeable profit and by law returns it to the treasury.

Currently, the cost of paying interest on reverse repo agreements and reserve balances outweighs income. The Fed reported Thursday that as of Dec. 28, the accounting metric it uses to track losses was $18 billion. Many observers expect that the Fed’s plans to raise interest rates further and keep them at high levels will mean fairly large losses for the central bank over time, even if these losses will not affect the action of the Fed’s monetary policy.

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