Here’s why US stocks have more downside, according to a fund manager – and where to find what’s going to break next

There appears to be competition between UK fiscal and monetary authorities over what can cause the most financial market turmoil, in light of Bank of England Governor Andrew Bailey telling a conference in Washington DC that pension funds had three days to sell UK government bonds.

A question floating around is what happens next as central banks around the world continue to raise interest rates in an effort to rein in runaway inflation. “The place to look to break things is wherever there is leverage and wherever we have an artificial market structure maintained by the authorities,” said John Ricciardi, head of global asset allocation. at Deuterium Capital Management and a longtime industry veteran.

A place to watch: Japan, where the yen USDJPY
has lost 27% in value against the dollar this year, while the Bank of Japan keeps rates at zero. “One thing that could break, and it’s something we’ve discussed internally, is the ability of the Japanese to maintain a zero interest rate policy,” he told MarketWatch in an interview.

Betting that Japanese interest rates would rise is a classic “widowmaker” trade in that it hasn’t succeeded in decades and its outcome would boost the beleaguered Japanese currency.

Another place to watch is Europe, where the European Central Bank is trying to keep Eurozone sovereign spreads pegged but peripheral CDS in Greece and Italy are widening. “If it continues, it won’t just be the euro – which is kind of helpful that it’s going down – but it will be in interest rates and interest rate differentials,” he said.

Ricciardi is the lead manager of the Deuterium Global Dynamic Allocation Fund, where investments are primarily driven by his model of the global economy, with contributions for central bank policy, market assessment and price trends.

Valuations aren’t much of an issue and actually look attractive outside of the US, according to Deuterium.

This fund anticipates a tough fourth quarter for both US equities and commodities, predicting that consumer spending will finally turn around, industrial production will slow and earnings growth expectations will drop. The company expects the fastest fall in U.S. consumption and retail sales since the 2008 financial crisis as workers react to falling inflation-adjusted incomes.

“You see it in the savings rate going down, you see it in their credit cards maxing out,” Ricciardi says. With mortgage rates soaring, refinancing is also not something consumers can turn to. “The big damage is yet to come in the stock market for the next month or two,” he said.

Ricciardi notes that this year bonds sold off first, then non-US currencies, before equities began to slump. He said it will likely reverse in that order as well, when the Federal Reserve pivots or the labor market turns — but that won’t be until next year.

He referred to the Plaza Accord of 1985, when the world’s central banks got together and took orchestrated action to drive down the dollar. “I don’t know if something like this would ever be on the table, but I could definitely see that the timing of a Fed pivot, that authorities somehow would come together to find a way ease the pressure on global liquidity from the appreciation of the dollar.

The market

The S&P 500 SPX
fell for five consecutive sessions and technically the Nasdaq Composite COMP
entered a bear market on Tuesday. But things are looking up on Wednesday, with ES00 stock futures

higher, and the dollar DXY
slightly lower. The 10-Year Treasury Yield BX:TMUBMUSD10Y
was 3.95%.

The buzz

Producer prices rose 0.4% in September, which was more than expected, to bring the year-on-year rate to 8.5%, the Labor Department reported. Minutes from the last meeting of the Federal Open Market Committee are due at 2 p.m. ET.

PepsiCo PEP
announced better-than-expected earnings and raised its outlook. Health technology company Philips PHG
lowered its sales outlook and said supply chain challengers had impacted deliveries and installations.

Intel INTC
could lay off thousands of jobs when it releases results later this month, according to a Bloomberg report.

modern mRNA
will be paid $250 million by Merck MRK
as they plan to jointly develop a personalized cancer vaccine.

Peabody Energy BTU Charcoal Producer
is in talks to merge with Coronado Global Resources AU:CRN.

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