Stocks trimmed their monthly surge and bond yields jumped, with investors awaiting Wednesday’s Federal Reserve decision for clues on whether officials will dial back the pace of rate hikes as early as December.

Big tech weighed heavily on the S&P 500, while energy shares whipsawed on news that President Joe Biden will call on Congress to consider tax penalties for producers accruing record profits. The equity gauge’s 8 per cent rally in October could lead to a US$22 billion purge of stocks by pension funds that rebalance on a monthly basis -- the most in at least a year, according to Credit Suisse Group AG’s calculations.

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A selloff in bonds across the curve sent two-year U.S. yields to around 4.5 per cent. Swap markets are pricing in a 75-basis-point hike this week amid the Fed’s most-aggressive tightening campaign in four decades. The outlook for the following meetings is less certain, with traders seeing a “coin toss” between an increase of that size and a 50-basis-point boost in the final month of 2022.

“This week will be loaded with scary stuff, from the Fed meeting and press conference to employment data on Friday,” wrote Paul Nolte, portfolio manager at Kingsview Investment Management. “Market expectations are for the Fed to begin signaling that their very aggressive rate hiking cycle will begin slowing down.”

JPMorgan Chase & Co.’s Marko Kolanovic is joining strategists who believe the aggressive hiking by global central banks is nearing an end. US policymakers will likely raise rates by 50 basis points in December and pause after one more 25-basis-point hike in the first quarter, he said. Financial indicators such as the inversion of the yield curve between 10-year and three-month Treasuries “all support a Fed pivot sooner rather than later,” wrote Morgan Stanley’s Michael Wilson.

Although October can evoke fear on Wall Street following stock market crashes in 1929, 1987 and 2008, it’s living up to its reputation as the best month in U.S. midterm election years. Now traders are holding out hope this October will follow a historical pattern of being a “bear-market killer” following a turbulent year for equities.

When it comes to elections, the fourth quarter of midterm years and the following first quarter historically have been the two strongest of the 16-quarter presidential cycle, delivering average gains of 6.4 per cent and 6.9 per cent respectively for the S&P 500, according to investment research firm CFRA.

Looking ahead, November has historically been one of the strongest months of the year for U.S. stocks, said Bespoke Investment Group. The S&P 500 has experienced an average gain of 0.82 per cent with positive returns 69 per cent of the time, according to data going back to 1983. Over the last 10 years, the gauge saw a median advance of 1.26 per cent and gains nine out of 10 times.

To Jason Draho at UBS Global Wealth Management, while the recent rally in stocks didn’t really look sustainable, that doesn’t mean markets can’t keep grinding higher in coming weeks, “provided that the Fed and labor and inflation data don’t disappoint.”

Global economic reports didn’t help sentiment on Monday. Euro-area inflation surged to a fresh all-time high, while the bloc’s economy lost momentum -- reinforcing fears that a recession is now all-but unavoidable. China’s factory and services activity contracted in October, with signs that things could worsen in the coming months.

Wheat prices soared after Russia suspended a deal guaranteeing safe passage of Ukrainian exports, with Moscow warning that shipments become “much riskier” without its participation even as new vessels loaded with crops set sail from Ukraine. 

Key events this week:

• Reserve Bank of Australia policy decision, Tuesday
• U.S. construction spending, ISM manufacturing index, Tuesday
• EIA crude oil inventory report, Wednesday
• Federal Reserve rate decision, Wednesday
• U.S. MBA mortgage applications, ADP employment, Wednesday
• Bank of England rate decision, Thursday
• U.S. factory orders, durable goods, trade, initial jobless claims, ISM services index, Thursday
• ECB President Christine Lagarde speaks, Thursday
• U.S. nonfarm payrolls, unemployment, Friday

Some of the main moves in markets:

Stocks

• The S&P 500 fell 0.7 per cent as of 4 p.m. New York time
• The Nasdaq 100 fell 1.2 per cent
• The Dow Jones Industrial Average fell 0.4 per cent
• The MSCI World index fell 0.4 per cent

Currencies

• The Bloomberg Dollar Spot Index rose 0.7 per cent
• The euro fell 0.8 per cent to US$0.9883
• The British pound fell 1.3 per cent to US$1.1468
• The Japanese yen fell 0.7 per cent to 148.68 per dollar

Cryptocurrencies

• Bitcoin fell 1.5 per cent to US$20,374.98
• Ether fell 2 per cent to US$1,563.92

Bonds

• The yield on 10-year Treasuries advanced three basis points to 4.05 per cent
• Germany’s 10-year yield advanced four basis points to 2.14 per cent
• Britain’s 10-year yield advanced four basis points to 3.52 per cent

Commodities

• West Texas Intermediate crude fell 2 per cent to US$86.16 a barrel
• Gold futures fell 0.5 per cent to US$1,636.40 an ounce