US stocks turn south on Fed policy fears as S&P 500 nears bear markets for some time

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NEW YORK (Reuters) – The S&P 500 approached bear market territory and the dollar strengthened on Friday as investor unease over the Federal Reserve’s tightening policy to fight inflation caused fear a recession.

Stocks had rebounded earlier in Europe and Asia after China slashed a key lending benchmark to support its flagging economy, initially helping drive gains on Wall Street.

China cut its prime rate for five-year loans, which influences mortgage prices, by 15 basis points in a steeper-than-expected cut as authorities seek to cushion the impact of an economic slowdown.

The benchmark S&P 500 slipped below 3837.248, 20% below its January 3 closing high, in a decline that would confirm a bear market if the index closed below that level.

How long the stock decline will last will depend on when inflation breaks, said Peter Tuz, president of Chase Investment Counsel in Charlottesville, Va.

“What really threw off investors this week, myself included, is when you have the types of companies that generally do well in economic weakness, do terribly,” Tuz said, referring to Walmart’s poor results. Inc and Target Corp.

The S&P 500 lost 1.80%, the Dow Jones Industrial Average fell 1.49% and the Nasdaq Composite fell 2.54%.

Equity valuations must fall and the expected return on investments, the discount rate, must rise, said Stephen Auth, director of equity investments at Federated Hermes.

“The market is starting to digest the idea that this could be a new world where the discount rate for risky assets is no longer zero,” Auth said.

“You see all these different areas of the market being pounded at the same time and that has been very unsettling for investors,” he added.

The MSCI gauge of stocks in 47 countries fell 0.82%, on track for its seventh straight weekly decline, its longest losing streak since the index was launched in 1990.

Earlier, the pan-European STOXX 600 index closed up 0.73%.

Yields on US Treasuries fell for a third straight session on worries about the outlook for growth. The yield on the benchmark 10-year bond fell 7.8 basis points to 2.778%.

Fed funds futures were firmer, suggesting that the US rates market has pulled back slightly from some of its more extreme rate hike estimates. The rates market has priced in a fed funds rate of 2.783% at the end of next year, down from a current level of 0.83%. The rate was as high as 2.9% two weeks ago.

The dollar recouped some of its recent losses against the euro but remained on pace with its worst weekly decline against the common currency since early February as investors wondered if the greenback’s month-long rally was finished.

The dollar has been buoyed in recent months by a flight to safety amid a rout in markets on fears of runaway inflation, a hawkish Fed and war in Ukraine.

The dollar index rose 0.223%, with the euro falling 0.4% to $1.0544. The Japanese yen rose 0.01% to 127.76 to the dollar.

Eurozone bond yields rose after two days of sharp declines as risk sentiment improved following a rate cut in China.

Germany’s 10-year government bond yield fell 1.2 basis points to 0.932%, well below last week’s eight-year high of 1.189%.

Markets are anticipating a 38 basis point tightening from the European Central Bank by its July meeting. This suggests that a 25bps move is fully priced in and markets are seeing about a 50/50 chance of an additional 25bps move.

Oil prices stabilized, on track for little change for the week as a planned European Union ban on Russian oil balanced concerns that slowing economic growth will hurt demand.

U.S. crude futures rose $1.02 to $113.23 and Brent rose 51 cents to settle at $112.55 a barrel.

Gold edged higher, heading for its first week of gains in five on lingering concerns over economic growth and the weaker dollar during the week.

Falling Treasury yields supported the safe-haven metal on the day, pushing spot gold up 0.1% to $1,843.29 an ounce at 6:02 p.m. GMT. Prices hit a one-week high earlier in the session.

US gold futures rose 0.1% to $1,842.10.

Bitcoin fell 4.16% to $29,029.40.

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