A roundup of Monday’s stock market results from across the Americas
📉 A bad day for Latin America’s markets:
Latin American markets appeared to suffer a knock-on effect from the US and global markets, closing with losses across the region, with the sharpest loss for Argentina’s Merval (MERVAL), which continued on a downward track after two weeks of historic highs, closing 3.08% lower on Monday. Energy companies Transener S.A. (TRAN) and Transportadora Gas Norte (TGNO4) saw their shares tumble 6.8% and 6.7%, respectivamente.
An executive at majority state-owned oil company YPF told Bloomberg Línea that the company’s 2023 investment plans will depend on the effect of inflation on fuel prices.
Brazil’s Ibovespa (IBOV) closed down 2.25% and Colombia’s Colcap (COLCAP) dropped 1.87%, following the publication of inflation data by the Colombian statistics agency DANE, and which was 12.53% over the past 12 months.
The variation of Colombian prices in November alone was 0.77% and the measurement so far in 2022, up to the eleventh month, stood at 11.72%, DANE said.
Peru’s S&P/BVL (SPBLPGPT) closed with a drop of 1.25%, attributed to the drop in industrial and financial sector shares. Shares of Corp Aceros Arequipa S.A. (CORAREI1) dropped 6.25%.
Mexico’s S&P/BMV IPC (MEXBOL) dropped 0.85% and Chile’s IPSA (IPSA) 0.31%.
🗽 On Wall Street:
Stocks kicked off the week with losses and bond yields climbed as a US services gauge unexpectedly rose, fueling speculation the Federal Reserve will keep its policy tight to tame stubborn inflation.
The selloff spread throughout all major S&P 500 sectors, with about 95% of the gauge’s companies in the red. Tesla Inc. tumbled almost 6.5% as Bloomberg News reported the electric-vehicle giant plans to lower production at its Shanghai factory. A slide in the Russell 2000 of small caps approached 3%.
The Nasdaq Composite (CCMPDL) dropped 1.93%, the S&P 500 1.79% and the Dow Jones Industrial Average 1.40%.
Treasuries slumped across the curve, driving 10-year yields to 3.6%. Swaps showed higher expectations on where the Fed terminal rate will be, with the market indicating a peak above 5% in the middle of 2023. The current benchmark sits in a range between 3.75% and 4%. The dollar halted a four-day rout.
“Good economic news is bad news for stocks as it will keep the risk elevated that rates might have to end up higher later next year,” said Ed Moya, senior market analyst at Oanda.
Equities also came under pressure on the view that a rally that drove the S&P 500 above a key technical indicator last week would be overdone given the current set of economic risks.
Morgan Stanley’s Michael Wilson, one of the US stock market’s most-vocal skeptics, says investors are better off booking profits. “We are now sellers again,” the strategist and his colleagues wrote.
Traders are also anxiously awaiting Friday’s report US producer prices -- one of the final pieces of data Fed officials will see before their Dec. 13-14 policy meeting. Inflation numbers over the past month have indicated pressures are slowly cooling, but remain very elevated.
An analysis of every S&P 500 bear market since 1960 suggests it could easily take over two years to recoup the index’s prior high, especially if recession plagues the near-term outlook, Bloomberg Intelligence strategists Gina Martin Adams and Michael Casper said.
“Markets are likely to remain volatile, and we do not think the economic conditions for a sustained upturn are yet in place,” said Mark Haefele, chief investment officer at UBS Global Wealth Management. “In our view, economic growth is likely to slow further next year as the cumulative impact of Fed rate hikes weighs on activity.”
Meantime, a majority of 291 respondents to the latest MLIV Pulse survey said leveraged loans would be the canary in the coal mine to indicate that corporate credit quality is getting worse.
About 28% of survey respondents expect defaults to jump significantly if US rates peak at or below 5%, which is about where the market bets the Fed will stop hiking. Another 63% see defaults surging if rates peak above 5%.
Elsewhere, oil erased gains as risk-averse investors pared crude positions ahead of the end of the year.
On the currency markets, the Bloomberg Dollar Spot Index rose 0.8%, the euro fell 0.5% to $1.0486, the British pound fell 0.8% to $1.2180 and the Japanese yen fell 1.9% to 136.80 per dollar.
🔑 The day’s key events:
Crude oil plunged to its biggest drop in two weeks on Monday, dragged down by falling stock markets and risk-averse investors reducing their positions in crude oil, erasing the effect on prices of the easing of further anti-Covid-19 measures announced in China earlier in the day.
WTI crude oil for January delivery started the week down 3.81% to $76.93 per barrel, while Brent crude for February delivery lost another 2.97% to fall to $83.03 per barrel.
The market is closely following China’s gradual reopening against the risk of an economic slowdown in the U.S. and other parts of the world, while futures holdings continue to fall as the year draws to a close, Bloomberg said. OPEC+ decided to maintain its production levels on Sunday.
The price cap on Russian oil by the European Union has already started to take effect, although experts do not expect it to have a high impact on supply, as the final agreed price ($60 a barrel) was held so as not to have a detrimental increase in global prices.
🍝 For the dinner table debate:
The emerging market crisis is presenting central banks with a vicious circle in which falling economic growth means they cannot maintain tight monetary conditions, but high inflation does not allow them to halt rate hikes either.
The consequence is a growing risk of monetary policy error. Countries such as Poland, Colombia, India and South Korea are walking a tightrope trying to find the exact level of borrowing costs that will not cripple their economies and keep consumer prices under control. The answer is neither clear nor easy. As long as the Federal Reserve continues to raise rates and China is weighed down by Covid-19, policymakers in poorer countries will remain at the mercy of factors beyond their control.
Emerging markets have witnessed an exodus of investors this year despite interest rates rising at an unprecedented pace. Local sovereign bonds suffered their biggest fall since at least 2009, and currencies faced their worst annual losses since the Russian default of 1998.
Although the rebound since October has mitigated the decline, smaller economies are one step away from a full-blown currency crisis. Further liquidation could close off access to capital markets and lead to a cost-of-living crisis or even an economic collapse like that of Sri Lanka.
Sebastián Osorio Idárraga, a content producer at Bloomberg Línea, and Rita Nazareth of Bloomberg News, contributed to this report.
