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U.S. Stocks Seeing Further Downside As Recent Optimism Fades

wallstreet oct24 17nov22 lt

After ending the previous session mostly lower, stocks have seen further downside in morning trading on Thursday. The major averages continue to give back ground following recent strength, with the S&P 500 pulling back off the two-month intraday high set during trading on Tuesday.

Currently, the major averages are well off their lows of the session but still firmly in negative territory. The Dow is down 175.98 points or 0.5 percent at 33,377.85, the Nasdaq is down 94.63 points or 0.9 percent at 11,089.03 and the S&P 500 is down 36.06 points or 0.9 percent at 3,922.73.

Overseas weakness had carried over onto Wall Street amid concerns about the outlook for global demand amid a renewed surge in Chinese Covid cases.

The recent jump in cases in China has dashed hopes that the country would soon begin easing Covid restrictions.

Hawkish comments from Federal Reserve officials have also dented recent optimism about the outlook for interest rates.

In remarks at an event hosted by Greater Louisville Inc., St. Louis Fed President James Bullard suggested the central bank's aggressive interest rate hikes have had "only limited effects on observed inflation."

Bullard said the Fed will need to continue increasing interest rates to reach a level that could be considered "sufficiently restrictive."

While the Fed could still slow the pace of rate hikes as soon as its December, traders seem worried the central bank will push the economy into a recession in its efforts to fight inflation.

Potentially adding to the recession worries, the Philadelphia Federal Reserve also released a report showing regional manufacturing unexpectedly contracted at a faster rate in the month of November.

The Philly Fed said its diffusion index for current activity tumbled to a negative 19.4 in November from a negative 8.7 in October, with a negative reading indicating a contraction in regional manufacturing activity.

The decrease by the Philly Fed index came as a surprise to economists, who had expected the index to inch up to a negative 6.2.

With the unexpected slump, the index dropped to its lowest level since hitting a negative 43.1 in May 2020.

"This bear market rally is coming to an end as this economy is about to feel the real impact of restrictive territory," said Edward Moya, senior market analyst at OANDA.

Housing stocks are turning in some of the market's worst performances on the day, resulting in a 2.6 percent plunge by the Philadelphia Housing Sector Index.

The weakness among housing stocks comes following the release of a Commerce Department showing a notable decrease in housing starts in the month of October.

Substantial weakness is also visible among transportation stocks, as reflected by the 2.5 percent slump by the Dow Jones Transportation Average.

Gold stocks are also seeing considerable weakness amid a decrease by the price of the precious metal, dragging the NYSE Arca Gold Bugs Index down by 1.9 percent.

Utilities, chemical and banking stocks have also shown notable moves to the downside, while tobacco stocks are among the few groups bucking the downtrend.

In overseas trading, stock markets across the Asia-Pacific region moved mostly lower during trading on Thursday. Japan's Nikkei 225 Index fell by 0.4 percent, while Hong Kong's Hang Seng Index dove by 1.2 percent.

The major European markets have also moved to the downside on the day. While the French CAC 40 Index is down by 0.7 percent, the U.K.'s FTSE 100 Index is down by 0.1 percent and the German DAX Index is nearly unchanged.

In the bond market, treasuries have shown a notable pullback after moving sharply higher over the past few sessions. Subsequently, the yield on the benchmark ten-year note, which moves opposite of its price, is up by 8.1 basis points at 3.773 percent.

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