Stocks and oil prices tumbled on Monday as investors weighed in on the impact of new Covid-19 outbreaks in China and looked to a likely Federal Reserve rate hike later this week.
The tech-focused Nasdaq Composite fell 262.59 points, or 2%, to 12581.22, its lowest level since December 2020, as China locked down key manufacturing regions of Shenzhen and Changchun due to a new outbreak of Covid-19 cases in these cities.
The S&P 500, which has been falling for four of the past five weeks, was down 31.20 points, or 0.7%, at 4173.11. The Dow Jones Industrial Average rose 1.05 points to 32945.24, breaking a two-session losing streak.
Apple shares fell 2.7% as the lockdown in China disrupted production at a key supplier. Other technology leaders also struggled. Amazon.com fell 2.5%; Alphabet, the parent company of Google, lost 3%.
Recently, investors have been spooked by the war in Ukraine and the rise in commodity prices caused by the conflict, in addition to the prospect of higher rates. They moved into supposed safe havens such as gold and bonds by selling stocks.
The Covid-19 outbreak in China could renew concerns about potential supply chain confusion and subsequent impact on the US economy. Shortages of everything from computer chips to chocolate hampered growth for months as the Omicron option disrupted business plans and increased costs for businesses large and small.
“China shutdowns and potential supply chain issues – people are afraid of that,” said Joe Saluzzi, co-head of equity trading at Themis Trading. “Just like you thought you were getting relief in the supply chain, we might get another hit.”
Potential economic losses could weigh on expectations of a Fed rate hike later this year, he said. Investors are paying attention to the Fed’s monetary policy meeting, which will end on Wednesday. The central bank is expected to raise its base rate for the first time since 2018 as officials seek to control inflation. He navigates the unusually difficult environment of a tough job market, supply disruptions and, more recently, the war in Ukraine.
Economists at Bank of America said they expect the Fed to remain aggressive this year and next amid growing concerns about inflation. U.S. central banks, led by Fed Chairman Jerome Powell, are likely to raise rates five times this year and four times in 2023, BofA economists said on Monday. “[W]We expect a hawkish message from Chairman Powell, who will likely reiterate that the Fed needs to take price stability seriously,” BofA said.
Uncertainty about the war in Ukraine and its impact on the global economy and commodity prices has upset interest rate forecasts. Mr. Powell told a House of Financial Services hearing on March 2 that the Fed “will act, but we will act cautiously as we learn more about the economic impact of the war in Ukraine.”
Bill Strazullo, chief market strategist at Bell Curve Trading, said he would be closely monitoring the Fed’s announcement on Wednesday for any signs that the war is limiting future rate hike plans.
“The big story was how many times the Fed was going to tighten policy,” he said. “Now you have this big exogenous shock. You have to consider the slowdown in global GDP.”
Short-term inflation expectations among US households jumped to record levels in February, according to a report from the Federal Reserve Bank of New York released on Monday. Respondents to the bank’s money survey noted that inflation will reach 6% in a year from 5.8% in January, in line with record expectations obtained in the November survey.
The Chinese Shanghai Composite index fell 2.6% after the introduction of quarantine due to the coronavirus. In Europe, the Stoxx Europe 600 rose 1.2% on shares in automakers and banks.
Quarantine could reduce demand for oil. Futures for Brent crude, the international benchmark, fell 5.1% to $106.90 a barrel.
“The Shenzhen lockdown and the possible Shanghai lockdown have dampened the enthusiasm of traders,” said Tom Kloza, global head of energy analysis at OPIS, which is owned by Dow Jones & Co., like The Wall Street Journal.
A week ago, Brent oil prices hit $139 a barrel, the highest level since 2008, as the war in Ukraine disrupted global commodity markets. This pushed gasoline prices to record highs, raising fears that limited consumers could lower spending ahead of the spring and summer driving seasons.
The 10-year Treasury yield rose to 2.139% on Monday from 2.004% on Friday, the highest level since June 2019. Yields move in the opposite direction, as do bond prices.
The underlying S&P 500 has fallen in four of the last five weeks.
Photo: Spencer Platt/Getty Images
In other commodities markets, trading in nickel remained suspended on the London Metal Exchange, which halted the market last week to contain a price spike.
Despite hopes for negotiations, the conflict is escalating, and there are growing fears among officials and investors that the war could spill over beyond Ukraine. A Russian airstrike on a Ukrainian military training center near the border with Poland on Sunday killed 35 people. Russia has requested military equipment and other assistance from China for its war effort, according to US officials.
Vitaly Katsenelson, chief executive of Investment Management Associates in Colorado, said his firm is buying shares in defense companies such as General Dynamics as countries, including Germany, signal plans to increase military spending. “Over the next decade, they will see a huge influx of revenue,” he said.
Commodity prices are hot right now. But the prices investors pay on the open market for commodities like coffee, copper, or corn may have little to do with the prices buyers pay in the store. Explains Dion Rabouin of the WSJ. Illustration: Adele Morgan
Email Joe Wallace at [email protected]
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