Stocks struggle for directions for Powell; UK rate bets rise

BLOOMBERG

Stocks struggled for direction as a hot inflation reading in the UK proved a cautionary tale for global central banks fighting inflation and markets wagering they’re close to the end of their tightening cycles. Futures contracts on the S&P 500 fluctuated in a narrow range after the gauge notched its first back-to-back losses in nearly four weeks. Economic bellwether FedEx Corp tumbled 3% in premarket trading after its outlook fell short of analyst consensus estimates on weakened demand.
A UK inflation setback comes as Federal Reserve Chair Jerome Powell prepares to give his semi-annual report to Congress on Wednesday, where he’s expected to reiterate warnings that higher rates may be needed to combat inflation. While Fed policymakers kept interest rates unchanged at their meeting last week, their forecasts imply around two additional quarter-point rate hikes or one half-point increase.
Rampant price pressures in the UK may sway global central banks against a downshift to easier policy, according to Pooja Kumra, senior European rates strategist at Toronto Dominion Bank.
“A key risk for markets is whether Powell provides any conditions for the FOMC getting back to their hiking cycle after a pause in June,” Kumra said. The second-quarter stock rally has hit a wall as investors lose their enthusiasm amid crowded bullish positioning, narrow breadth, high valuations, and hawkish Fed signals. Goldman Sachs Group Inc strategists including Cormac Conners and David J Kostin recommend hedging S&P 500 exposure.
Goldman’s base case is for the S&P 500 to climb to 4,700 in 12 months but the investment bank also sees a drop to 3,400 as possible if a recession becomes more likely. The dollar advanced before Powell’s testimony, while the pound fell after erasing early gains on the back of another shock inflation reading.  UK benchmark gilt yields climbed six basis points as traders ramped up bets for further Bank of England interest-rate hikes to a level not seen since the turn of the century a day before a policy meeting.

Investors should hedge S&P 500 Rally: Goldman
Investors should consider hedging the rally in the S&P 500 for recession-related risks, say Goldman Sachs Group Inc strategists, citing several equity indicators. Bullish option positions look crowded, the rally has been narrow, valuations remain high, optimistic growth expectations are being priced in and overall investor posture isn’t light anymore, strategists including Cormac Conners and David J Kostin wrote in a note. “We prefer to maintain upside exposure to equity while utilising the options market to hedge the potential 23% downside in a recession scenario,” they wrote.
There’s a one in four chance of recession over the next 12 months and if that prospect become more likely, the S&P 500 could decline to 3,400, they added.