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Stocks slide, dollar gains as market gauges Fed’s rate policy

Global stocks headed for a third straight day of losses and the dollar rose on Tuesday as the market weighed how long the Federal Reserve would
keep interest rates high and “restrictive” to the U.S. economy.

December 7, 2022
By Herbert Lash and Alun John
7 December 2022

By Herbert Lash and Alun John

NEW YORK/LONDON, Dec 6 (Reuters) – Global stocks headed
for a third straight day of losses and the dollar rose on
Tuesday as the market weighed how long the Federal Reserve would
keep interest rates high and “restrictive” to the U.S. economy.

Stocks on Wall Street fell, will all sectors in the red with
the exception of utilities. The major bourses in Europe also
declined as concerns mounted about a global slowdown before a
raft of major central bank decisions on rate policies next week.

MSCI’s U.S.-centric all-country world index
fell 1.55%, on track for a third down day in a row after hitting
a three-month high last week.

The dollar gained against the euro, yen, British pound and
Canadian dollar, among other major currencies.

Treasury yields fell, but more at the long end of maturities
than the short end, which deepened the inverted yield curve, a
market indicator of a looming recession. The gap between yields
on two- and 10-year notes was -84.2 basis points.

The market needs to recognize that a recession most likely
is a reality, not just a hypothetical, and that valuations need
to go lower, said Jason Pride, chief investment officer of
private wealth at Glenmede in Philadelphia.

“During recessions, markets on average price at a discount
to fair value, which they have not yet done,” Pride said. “There
is not a single instance in which a market has bottomed before
the recession started.”

Data released on Monday showing U.S. services industry
activity unexpectedly picked up in November and last week’s
robust U.S. payrolls report have raised doubts about how soon
the Fed might ease monetary policy. The Fed aims to slow growth
by reducing credit and money available for banks to lend.

Futures show the market expects the Fed’s peak terminal rate
to rise to 4.967% next May, but by December 2023 to have fallen
to 4.511% on speculation the Fed will cut rates to help the
economy rebound from an expected slowdown.

“We believe we hit the lows already and it’s not going to be
a straight line up, but a choppy road ahead,” said King Lip,
chief investment strategist at BakerAvenue Wealth Management in
San Francisco.

“We’re in the minority in terms of our forecast because a
lot of the colleagues we’ve been speaking to are much more
pessimistic,” he said.

Wall Street was dragged lower by banking shares and Meta
Platforms Inc, after European Union regulators ruled
its Facebook and Instagram units should not require users to
agree to personalized ads based on their digital activity.

The Dow Jones Industrial Average fell 1.36%, the S&P
500 slid 1.79% and the Nasdaq Composite dropped
2.26%. In Europe, the STOXX 600 index closed down
0.58%.

The dollar rose investors waited for next week’s expected 50
basis points rate hike by the Fed.

The euro fell 0.27% to $1.0463, while the yen
weakened 0.14% at 136.91 per dollar.

Euro zone government bond yields fell after two European
Central Bank officials signaled inflation and rates may be close
to peaking in the run-up to a raft of major central bank
decisions.

The ECB, the Bank of England and the Fed all meet next week
to discuss monetary policy. The Reserve Bank of Australia on
Tuesday offered a glimpse of decisions to come after raising
interest rates to decade highs and sticking with a prediction of
more hikes ahead.

All eyes will be on the release next Tuesday of November’s
U.S. consumer price index data, which will provide insight into
the pace of inflation.

The yield on U.S. 10-year notes fell 8.8 basis
points to 3.511%.

Oil prices fell in a volatile market as the dollar stayed
strong and economic uncertainty offset the bullish impact of a
price cap placed on Russian oil and the prospects of a demand
boost in China.

On Monday, crude futures recorded their biggest daily drop
in two weeks.

U.S. crude futures fell $2.68 to settle at $74.25 a
barrel, while Brent settled down $3.33 at $79.35.

U.S. gold futures settled up 0.1% at $1,782.40 an
ounce.

(Reporting by Herbert Lash, additional reporting by Anshuman
Daga in Singapore and Alun John in London; Editing by Jonathan
Oatis and Nick Zieminski)

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