(Bloomberg) — Stocks fell as traders trimmed bets on Federal Reserve rate cuts, sending Treasury 10-year yields above 4%. Brent crude jumped to $80 a barrel, with mounting tensions in the Middle East raising speculation that Israel may attack Iran’s oil infrastructure.
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In the wake of surprisingly strong job growth for September, expectations for a continued slowdown in inflation reinforced speculation that policymakers will opt for a smaller rate reduction next month. Money markets no longer see another half-point cut this year, while a quarter-point reduction in November that was once seen as certain is now priced at about an 80% probability.
“Friday’s strong jobs report not only appeared to kill any chance of a 50-basis-point rate cut in November, it kickstarted chatter about the Fed leaving rates unchanged if economic data continues to come in hotter than expected,” said Chris Larkin at E*Trade from Morgan Stanley. “But as last week showed, geopolitics can’t be ignored.”
To Dave Sekera at Morningstar, if there is any further geopolitical escalation, that would potentially spur the risk-off trade — with growth shares underperforming value ones.
“Typically, in a risk-off trade, you’re going to see rotation into defense stocks, but I’d be careful if you’re an investor today,” he said. “Some of the defensive sectors today are already overvalued. Unlike a typical risk-off trade, I think oil stocks would go up.”
The S&P 500 fell to around 5,725. Amazon.com Inc. slipped after a rare analyst downgrade that cited concerns over margin trends into next year, which growth in the cloud computing business is unlikely to compensate for. Pfizer Inc. climbed on a news report that activist investor Starboard Value has taken a stake of about $1 billion in the drugmaker.
Treasury 10-year yields rose five basis points to 4.01%. West Texas Intermediate crude climbed 3.7% to $77.12 a barrel.
Despite the drop in stocks, two of Wall Street’s top strategists have turned more optimistic on signs of a robust labor market, economic…
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