Stocks Waver as Investors Face Gut Check on Rally: Markets Wrap

(Bloomberg) — Stocks struggled on Tuesday as the second-quarter rally met resistance from economic headwinds and signs that positioning is overbought.

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European stocks were little changed as worries about the Chinese economy curbed risk appetite. Specialty chemicals company Lanxess AG fell as much as 15% on a profit warning, dragging shares of peers including BASF SE lower. Drug maker Sanofi gained the most since March after a favorable arbitration ruling. US contracts declined after Wall Street was shut for a holiday Monday. An index of Asia-Pacific shares fell.

Investors caught between fear of missing out and concerns markets have run too far, too fast are contending with overblown valuations and economic headwinds. Bullish positioning in US equity futures grew last week, taking it to the most extended levels for the S&P 500 and Nasdaq 100 in data going back to 2010, according to Citigroup strategists.

The path of US monetary policy is another wild card. Federal Reserve Chair Jerome Powell will give his semi-annual report to Congress on Wednesday. Policymakers at the Fed kept interest rates unchanged at their latest meeting but warned of more tightening ahead. Investors also await the outcome of policy meetings in Turkey, the UK and Switzerland.

“The focus this week remains on the central banks and whether we are as close to the end of the tightening cycle as everyone wants to believe,” said Craig Erlam, a senior market analyst at Oanda. “Markets have been overly optimistic. The data simply hasn’t justified changing course yet. Rate cuts this year look more fantasy than reality now.”

The Fed decision last week came with forecasts for higher borrowing costs of 5.6% in 2023, implying two additional quarter-point rate hikes or one half-point increase before the end of the year.

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Elsewhere in markets, US Treasury yields rose after the break from trading Monday. Oil fell as China’s plans to support its economy were seen as insufficient to reignite demand.

Alibaba Group Holding Ltd. whipsawed before trading about 1.5%…


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