Shares fall to Powell’s Taper Comments

Just as a worrying new variant of the coronavirus began to spread, the Federal Reserve chairman signaled on Tuesday that the central bank could reduce its support for the economy more quickly, send a shudder through Wall Street and push the S&P 500 negative for November. .

A sale that is already underway accelerated after the chairman, Jerome H. Powell, told a Senate committee that inflation was likely to continue for years to come and that the Fed would consider taking down its purchases of government bonds. maybe a few months earlier ”than previously expected.

The bond-buying program has been a crucial factor in the rapid rise in equities since the start of the pandemic – the S&P 500 has more than doubled since March 2020 – and the market’s reaction to Mr. Powell’s comments were immediate. The benchmark index fell sharply and closed down 1.9 percent.

“I think it’s an important moment,” said Nathan Koppikar, a portfolio manager at San Francisco hedge fund Orso Partners, who often bets that certain stocks will fall. “The Fed is finally putting its interest in the ground and saying the bubble has been holding on long enough.”

When the S&P 500 hit rock bottom in March 2020, the Fed restarted the type of money printing program, known as quantitative easing, that it instituted because of the 2008 financial crisis. The central bank pumped trillions of dollars into the financial system through assets buying like treasury bonds with newly created dollars – a major source of impetus for the seemingly relentless rally in stock prices.

That program, however, would never last forever, and this year the Fed began discussions about reversing its bond purchases. After some jitter this fall, investors seemed to have the Fed’s plans in hand. Mar Mr. Powell’s statements about possible responses to persistent inflation – which the central bank had long described as “perishable” – with more aggressive tapering represent a major milestone.

“The retirement of ‘transitory’ means we are also taking quantitative reconciliation with retirement, which has left its welcome,” said Rick Rieder, head of the global allocation investment team at New York’s money management firm BlackRock.

Without a regular influx of newly created dollars into capital markets, stocks can be a rockier run than they have been in over a year. “Volatility will be higher,” he said. said Rieder.

An earlier end to the Fed’s bond buying program could be a tacit signal of an earlier rise in interest rates. Yields on short-term bonds, which are strongly influenced by expectations of a rise in the Fed, spiked on Tuesday. The yield on the two-year treasury note went to 0.56 percent from about 0.43 percent in relatively short order, but some of that surge melted away by noon, and the yield ended the day at about 0.52 percent.

Action prices fell around the world before Mr. Powell’s testimony when investors struggled to understand the danger posed by the Omicron variant, which began turning markets last week. The Stoxx Europe 600 closed 0.9 percent; in Asia, the Nikkei 225 in Japan and the Hang Seng in Hong Kong each fell more than 1.5 percent.

Concerns about possible economic damage of the variant, such as travel restrictions, again hammered the crude oil prices on Tuesday. Futures prices for benchmark U.S. crude fell more than 4 percent, and have been down about 20 percent since early November.

Taken at face value, such a sale means that investors see growing risks that the Omicron variant will trigger a global economic slowdown. But some investors think prices are likely to reverse.

“Is there really a reason for oil to trade up to $ 66 a barrel when we were north of $ 80? Are we literally shutting down the entire world economy?” asked Jack Janasiewicz, a portfolio manager with Natixis Investment Managers. “It’s an overreaction.”

Investors remain particularly focused on the effectiveness of faxes against the new variant. Moderna’s chief executive, a fax maker, said in an interview on Tuesday that there could be a “material drip” in the effectiveness of current faxes for Omicron. The director, Stéphane Bancel, told The Financial Times that it could take months before an Omicron-specific fax could be produced on a scale, adding that it would be risky to move the entire fax production of the company while other variants were still in place. were.

Financial markets have been unstable since the identification of the Omicron variant in southern Africa late last week. The S&P 500 had its worst day since February on Friday, dropping 2.3 percent. On Monday, it recovered somewhat as politicians around the world warned of panic, but Tuesday’s fall more than wiped out those gains.

Despite the swings of the last few days, investors are sitting on solid profits this year. The S&P 500 is up more than 21 percent in 2021 – and that may be the reason why sales will worsen next month, as investors try to keep their profits for the year in the face of growing concerns about what’s happening.

“You have uncertainty about Covid. You have uncertainty about inflation, uncertainty about global central banking policy,” said Daniel Ivascyn, the group’s chief investment officer at PIMCO, a large fund manager based in Newport Beach, California. “Any of these things may not be enough. to derail the rally, but all these problems combined with poor liquidity at the end of the year can certainly lead to some significant disadvantage. “

However, investors say the Omicron variant is unlikely to trigger the same kind of reaction from governments, companies or individuals as the virus did when it first emerged. Even though Omicron is a bigger threat than the Delta variant for it, investors expect the effect on the market to be less severe than the nearly 34 percent crash in stock prices between February and March 2020.

“The worst case scenario is not March 2020 again,” said Jeb Breece, a principal at Spears Abacus, an independent money management company in Manhattan. “Fear and strangeness were such a big component of it. I see us not doing that again.”

Coral Murphy Marcos contributed reporting.

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