U.S. stocks decline as investors watch the default clock tick towards midnight

<html xmlns="http://www.w3.org/1999/xhtml"><head><title>LIVE MARKETS-U.S. stocks decline as investors watch the default clock tick towards midnight</title></head><body>

U.S. equity indexes extend sell-off; chips tumble

Real estate weakest S&P 500 sector: energy sole gainer

Dollar, crude gain; gold down; bitcoin drops >3%

U.S. 10-Year Treasury yield rises to ~3.74%

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The partisan debt ceiling slap-fight in Washington continued to sour investor risk appetite on Wednesday with little in the way of progress toward resolution.

All three major stock indexes closed lower, but off session lows, with very few catalysts to distract market participants from the Capitol Hill Follies.

The sell-off was broad, with chips .SOX, real estate .SPLRCR and financials .SPSY among the hardest hit groups.

Market participants largely ignored the release of the minutes from the Fed's March meeting, at which the central bank increased the Fed funds target rate 25 basis points.

The minutes seemed to cement expectations for a pause at next month's meeting, but some division among officials regarding the path forward appears evident.

Financial markets are pricing in a 70.5% likelihood that Powell & Co will put the breaks on its rate-hike barrage in June, according to CME's FedWatch tool.

Even so, it's all about the debt limit.

"If the debt ceiling debate isn't resolved quickly the Fed will not raise rates on June 14 even if the data suggests it's needed," says Quincy Crosby, chief global strategist at LPL Financial.

Microsoft MSFT.O and Alphabet GOOGL.O were the weightiest drags on the S&P 500 .SPX.

Among big movers, retailers Abercrombie & Fitch Co ANF.N soared 31.1%, Urban Outfitters URBN.O jumped 17.6% Kohl's Corp KSS.N advanced 7.5% after the retailers posted upbeat results.

On the downside, Agilent Technologies A.N slid 5.9%.

Nvidia NVDA.O ended down 0.5% ahead of its results, which are expected after the close Wednesday.

Here's your closing snapshot:

(Stephen Culp)



U.S. stocks showed little initial reaction after minutes from the Federal Reserve's March meeting showed officials "generally agreed" that continued interest rate hikes "had become less certain."

The Fed interrupted a perfectly good sell-off with the release, which also warned that further tightening could be warranted if inflation refuses to cool at an acceptable rate.

On the whole, however, the release appeared to bolster the likelihood of a June pause, but revealed the officials were more divided regarding the road ahead.

It was all pretty much what the market expected. While stocks were a bit lower in the immediate aftermath, they are well off session lows.

At 2:15PM ET, the Dow Jones Industrial Average .DJI fell 246.4 points, or 0.75%, to 32,809.11, the S&P 500 .SPX lost 32.16 points, or 0.78%, to 4,113.42 and the Nasdaq Composite .IXIC dropped 94.98 points, or 0.76%, to 12,465.26.

Here's a minute-by-minute of the S&P 500 directly following the minutes' release:

(Stephen Culp)



Last week’s S&P 500 breakout to a new recovery high caught the attention of many market players, but Doug Ramsey, chief investment officer & portfolio manager at The Leuthold Group, says that the impact on their market indicator, the Major Trend Index, was almost non-existent.

Overall, Ramsey believes the bulk of the evidence suggests there are significant risks in chasing the market’s narrow new highs, with the full impact of the last 14 months of tightening still to be felt. Ramsey says that Leuthold's tactical portfolios continue to be positioned conservatively, with net equity exposure of 48-49%.

That said, Ramsey says The Leuthold Group cannot help being impressed by the action of the S&P 500 and NASDAQ in the face of financial market and economic signals that, to them, still look “pre-recessionary.”

Indeed, to Ramsey, under the surface, index action appears "bi-polar," given “too many highs and too many lows,” internally.

Ramsey says that after last week’s breakout, the S&P 500’s rally from its October 12th bottom has now lasted longer than any other bear-market rally in history (and by a margin of more than two months).

"Technically, the rally seems too weak to be a new bull, yet too persistent to be an intermission in an ongoing bear. Hmmm… not a bull, not a bear, but perhaps a bunny—a market that hops around without going anywhere?"

(Terence Gabriel)



With the Federal Reserve suggesting a pause in rate hikes is near, or at least nearly near, you'd think that would be good news for stock investors who have been anxiously awaiting the end of the aggressive tightening phase.

John Lynch, chief investment officer at Comerica Wealth Management writes that banking system's stress and indications of peaking inflation suggest that the Fed has reached a terminal high point for this cycle.

But the CIO is wary about what means for the market next as "history shows the equity market tends to struggle before the next easing cycle beings."

While the U.S. Treasury yield curve typically steepens after the last Fed rate hike and before a recession, the S&P 500 shows "significant weakness" after the last hike when the economy is heading into a recession, Lynch says.

To be sure, if there is no recession, the market has shown reasonable performance between the last hike and the first rate cut, historically. And Lynch points to limited market disruption after Fed hikes around 1984 and 1989. Additionally, he notes that the market bottomed on the last Fed hike in 1995.

But when there was a recession, that's been a different story, resulting in a significantly weaker market.

"The explanation lies in the lagged effect of monetary policy on the economy, with the timing of recession often at odds with the Fed’s estimates, and the concomitant decline in earnings, by the time monetary officials stop raising rates," Lynch writes.

After the final hike, investors tend to price in the next step, which is Fed easing, with average gains of ~7.1% between the last hike and first cut. But "market lows are typically not reached until after the Fed easing cycle begins."

"Since 1980, the S&P on average bottomed out 293 days after the last rate hike, with an average decline of 21.4%," he said.

While the equities outcome "varies significantly" whether there's a pause or a pivot, Lynch notes that since bonds fair well under both scenarios, supporting a case for diversified strategies.

(Sinéad Carew)



Demand for home loans fell by 4.6% last week as would-be borrowers gave a resounding thumbs-down to rising mortgage rates.

The average 30-year fixed contract rate USMG=ECI gained 12 basis points to hit their highest level since mid-March, according to the Mortgage Bankers Association (MBA).

This failed to impress potential buyers USMGPI=ECI and refinancers USMGR=ECI, sending applications down 4.3% and 5.4%, respectively.

Mortgage rates have been on a bumpy ride, aping the ups-and-downs of benchmark Treasury yields, and with this, home price growth has come back to earth. And while an inventory drought in the resale market has supported home builders .SPCOMHOME, boosting builder sentiment out of the basement, looming economic uncertainties - we're looking at you, debt ceiling negotiators - are likely keeping housing market participants on the curb.

"Since rates have been so volatile and for-sale inventory still scarce, we have yet to see sustained growth in purchase applications," said Joel Kan, deputy chief economist at MBA. "Investors remained attuned to the uncertainty around the U.S. debt ceiling and communication from several Federal Reserve officials last week, which sent Treasury yields higher, along with mortgage rates."

Total mortgage demand remains 35% below the same week last year:

The most forward-looking predictor of the whipsawed sector is the stock market.

Housing-related shares soared above the broader market in the first years of COVID. Then the sector heated up too much, with red-hot home price growth and climbing mortgage rates pricing potential buyers out, particularly at the low end of the market.

But that relationship has since reversed.

Rebasing the Philadelphia SE Housing index .HGX, the S&P 1500 Home Building index .SPCOMHOME and the S&P 500 .SPX back 12 months, housing stocks have handily outperformed.

Notably, however, they've taken a sharp dip in the last week, as Treasury Yields spiked and mounting worries over contentious debt ceiling talks continue to spook investors:

(Stephen Culp)



Wall Street appears hell-bent on extending its sell-off on Wednesday as the ongoing partisan mud-wrestling in Washington over raising the debt ceiling and avoiding U.S. default seems to be yielding scant progress.

All three major U.S. stock indexes are down for the second straight day.

Chips are a sore spot, with the Philadelphia SE Semiconductor index .SOX plunging 1.7% after FT reported Nvidia's NVDA.O chief said the chip war with China risks "enormous damage" to tech shares.

Market participants are also eyeing the clock for 2 p.m. Eastern, when Powell & Company releases the minutes from their most recent monetary policy meeting at which the central bank implemented what many hope to the last in a relentless barrage of interest rate hikes.

Of particular interest will be the extent of any dissent in the ranks as investors jockey over the duration of restrictive Fed policy and the timing of the inevitable pivot.

At last glance, financial markets have priced in a 64.9% likelihood of a rate hike pause at next month's meeting, per CME's FedWatch tool.

Elsewhere, apparel retailer Abercrombie & Fitch Inc ANF.N posted a surprise earnings beat and upped its annual sales guidance, sending its shares surging 21.4%.

Netflix NFLX.O is gaining 1.5% as the streaming service expanded its crackdown on password sharing.

Regional banks, under pressure of late due to liquidity concerns following the failure of SVB and Signature, are having another bad day. The KBW Regional Bank index .KRX is down 1.9%.

Nvidia and Tesla TSLA.O are weighing heaviest on the S&P 500 .SPX

Here's where things stood as of 0949 EDT:

(Stephen Culp)



Energy .SPNY was the only S&P 500 .SPX sector to post a gain last year. In fact, the group surged 59% in 2022, and posted its biggest yearly rise ever.

All that has changed so far in 2023. Energy has been the weakest SPX sector so far, falling about 9% through Tuesday's close.

With this, technical damage is mounting:

Energy now stands down just over 15% from its November 2021 high. Indeed, after coming within 2% of its 2014 record high, the sector has been on the back foot.

Since December 2020, SPNY has been on a bullish run vs its 12-month moving average (MMA). Through April, it has recorded 29-straight monthly closes above it.

That's the longest such streak since a 62-month run of closes above the 12-MMA that ended in July 2008. Once that streak ended in 2008, energy ultimately suffered a severe bear market.

Another significant streak of 26-straight closes above the 12-MMA ended in September 2014. The group then once again suffered saw a severe bear market play out.

With just five trading days to go in May, SPNY, which ended Tuesday at 613.23, is threatening to end its run of monthly closes above the 12-MMA, which now resides just over 633. The moving average is just over 3% above Tuesday's SPNY close.

Additionally, the monthly moving average convergence/divergence (MACD) is flashing a sell signal. Of note, bearish MACD crosses occurred just after the 2008 and 2014 tops.

Another cause for concern is the energy sector's relative strength vs the S&P 500 index. The SPNY/SPX ratio appears to be, once again, faltering at the resistance line from its 2008 high.

Meanwhile, on the plus side, since forming a daily hammer candle on May 4, crude futures CLc1 have seen a greater recovery. However, the futures are still down around 8% YTD, and remain well below their descending 200-day moving average.

Natural gas NGc1 continues to languish at low levels.

(Terence Gabriel)



(Terence Gabriel is a Reuters market analyst. The views expressed are his own)


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