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Investors on guard for market stress as Fed signals more hikes ahead

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A hawkish message from the Federal Reserve amid a robust stock market rally is presenting investors with a conundrum: how to maintain exposure to rising equities while also guarding against the possible upheavals tighter monetary policy can bring.

The central bank left rates unchanged on Wednesday, as widely expected, but surprised some markets by signalling that borrowing costs will likely increase another half a percentage point by the end of this year as it reacts to a still-strong economy and a slower decline in inflation. Traders’ expectations for peak rates moved higher after the announcement.

Many investors believe an additional 50 basis points in rate increases – should the Fed deem them necessary – is by itself unlikely to stop a rally in U.S. stocks that has seen the S&P 500 rise 24% from last year’s lows. The central bank has already raised rates by 500 basis points since last year and is widely seen to be near the end of its rate hiking cycle.

But some are growing worried that tighter monetary policy is increasing the chances of ructions in the financial system similar to the crisis that saw several high profile bank collapses this year and sparked weeks of financial market volatility.

While the U.S. economy has been largely resilient – the banking system aside – investors have cast a wary eye on areas that may be particularly vulnerable as easy money dries up. Among the potential weak spots are commercial real estate, where a wave of defaults could have repercussions for banks and the broader economy, as well as other credit market sectors.

“The risk of pushing further here without giving things a little more time is that you run the risk of things breaking,” said Josh Emanuel, chief investment officer at investment management firm Wilshire. “I’m starting to get concerned that there’s a growing risk of a credit crunch.”

At the same time, Emanuel said it was “dangerous” to be underweight equities, which have rallied on dissipating recession fears and excitement over developments in artificial intelligence. As a result, he is staying away from assets that could be hit hard if market stress suddenly increases, such as small cap stocks.

The S&P 500 edged up 0.1% on Wednesday after shuffling between gains and losses. Bond yields, which move inversely to prices, inched higher. The S&P 500 is up 15% this year, while the Nasdaq has gained 30%.

James St. Aubin, chief investment officer at Sierra Investment Management, has been adding to equity positions during the rally but plans to reverse that stance if the trend starts to change. He remains on guard for further stresses in the banking system, which he believes can be exacerbated by higher for longer rates and an inverted yield curve, making lending less profitable for banks.

“The longer the rate curve stays inverted the more pressure it puts on the banking system because it’s a very unprofitable place to be,” he said.

A similar sentiment came from DoubleLine Capital CEO Jeffrey Gundlach, who told CNBC that “if the Fed follows the path that they’re talking about, … they are going to break something.”

He recommended increasing allocations to high-quality bonds while reducing stock holdings, noting that rising yields have made bonds cheaper and more attractive to income-seeking investors.

Mark Heppenstall, chief investment officer of Penn Mutual Asset Management, believes a burgeoning stock market rally could loosen credit conditions, threatening to exacerbate consumer prices – an undesirable outcome for the inflation-fighting Fed.

“The appreciation in equities that we’ve seen recently, some of that enthusiasm may have the impact of having the Fed becoming more active with tightening if we continue,” he said.

Of course, there is little guarantee that higher rates will end up cracking something in the economy – or that such an event, if it were to occur, would deal a catastrophic blow to stocks. The S&P 500 is up 14% from a low reached after the banking crisis in March.

Josh Jamner, investment strategy analyst at ClearBridge Investments, believes investors will soon start focusing more on fundamentals such as company earnings rather than macro concerns such as monetary policy and inflation.

“If things like AI are impacting earnings expectations, we think that will flow through in a more meaningful way because the macro backdrop is more steady,” he said.

“After having done 500 bps in a year… another 25 or 50 won’t be the key determinant for the economy,” he said.

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Comet fragment lights up sky over Spain and Portugal ‘like a movie’

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By Catarina Demony and Ana Cantero

LISBON (Reuters) – A bright comet fragment lit up the skies over parts of Spain and Portugal late on Saturday, according to the European Space Agency (ESA), with one Lisbon resident saying the dazzling display “felt like a movie”.

On Sunday morning, the ESA shared on X a video captured by its “fireball camera” of what it described as a “stunning meteor” over the skies of the western Spanish city of Caceres, near the Portuguese border.

But it later said it appeared to be a “small piece of a comet” and not a meteor, estimating it flew over Spain and Portugal at a speed of 45 km (28 miles) per second before burning up over the Atlantic.

“The likelihood of any meteorites being found is very low,” the ESA said.

In both countries, videos shot in several cities and towns went viral on social media, showing the object crossing the night sky at high speed and illuminating it in bright tones of blue and green.

The Spanish Calar Alto astronomical observatory also said a preliminary analysis by Andalusia’s Institute of Astrophysics revealed the object had a “cometary origin”.

During a concert in the Portuguese city of Barcelos, the object was filmed streaking across the sky as the singer performed. Another video showed the skies of Porto, Portugal’s second biggest city, turning bright for a few seconds.

Many contacted emergency services to report what happened. A spokesperson for the Spanish Emergency service 112, in Madrid, told Europa Press news agency it had received several calls.

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Lisbon resident Bernardo Taborda, 31, told Reuters he was walking around the city with friends when the sky suddenly turned bright green: “It almost looked like daylight … we all looked back and saw it.”

“It felt like a movie, we all looked at each other and we were stunned,” Taborda said. “It was amazing.”

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Helicopter carrying Iran’s President Raisi crashes in mountains, official says

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By Parisa Hafezi and Elwely Elwelly

DUBAI (Reuters) -A helicopter carrying Iranian President Ebrahim Raisi and his foreign minister crashed on Sunday as it was crossing mountain terrain in heavy fog, an Iranian official told Reuters, and rescuers were making their way to the site of the incident.

The official said the lives of Raisi and Foreign Minister Hossein Amirabdollahian were “at risk following the helicopter crash”, which happened on the way back from a visit to Iran’s border with Azerbaijan.

“We are still hopeful but information coming from the crash site is very concerning,” said the official, speaking on condition of anonymity.

The bad weather was complicating rescue efforts, the state news agency IRNA reported. The chief of staff of Iran’s army ordered all the resources of the army and the elite Revolutionary Guard to be put to use in the search and rescue operations.

State TV stopped all its regular programming to show prayers being held for Raisi across the country and, in a corner of the screen, live coverage of rescue teams deployed on foot in the mountainous area in heavy fog.

The rescue teams were expected to reach the site of the crash later on Sunday evening, state TV reported.

Raisi, 63, was elected president in 2021, and since taking office has ordered a tightening of morality laws, overseen a bloody crackdown on anti-government protests and pushed hard in nuclear talks with world powers.

In Iran’s dual political system, split between the clerical establishment and the government, it is the supreme leader rather than the president who has the final say on all major policies.

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But many have seen Raisi as a strong contender to succeed his 85-year-old mentor, Supreme Leader Ayatollah Ali Khamenei, who has strongly endorsed Raisi’s main policies.

Raisi’s victory in a closely managed election in 2021 brought all branches of power under the control of hardliners, after eight years when the presidency had been held by pragmatist Hassan Rouhani, who negotiated a nuclear deal with Washington.

However, Raisi’s standing may have been dented by widespread protests against clerical rule and a failure to turn around Iran’s economy, hamstrung by Western sanctions.

Raisi had been at the Azerbaijani border to inaugurate the Qiz-Qalaisi Dam, a joint project.

Interior Minister Ahmed Vahidi told state TV only that one of the helicopters in a group of three had come down in the incident, and that authorities were awaiting further details.

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Sean ‘Diddy’ Combs apologizes after video depicting attack on ex-girlfriend

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By Katharine Jackson

(Reuters) – Music mogul Sean “Diddy” Combs posted an apology to social media on Sunday, two days after the release of hotel surveillance video that appeared to show him attacking his ex-girlfriend.

“I’m truly sorry,” Combs said in a video post on his Instagram page. “My behavior on that video is inexcusable. I take full responsibility for my actions in that video. I’m disgusted. I was disgusted then when I did it. I’m disgusted now.”

Addressing the camera directly, Combs said he had sought therapy and gone into rehab.

In the surveillance video from 2016, which was released by CNN on Friday, the rapper appears to grab R&B vocalist Casandra Ventura as she waits by an elevator in a California hotel. Clad only in a towel, he throws her to the floor, kicking her repeatedly before dragging her toward a hallway, the video shows.

A representative for Combs could not be immediately reached for further comment.

Ventura, who performs under the stage name Cassie, sued Combs in 2023, accusing him of serial physical abuse, sexual slavery and rape during a 10-year professional and romantic relationship in which he controlled her through intimidation, drugs and alcohol. The parties settled the matter the following day for undisclosed terms. Representatives for Combs said at the time the settlement was “in no way an admission of wrongdoing.”

The lawsuit was one of at least four civil complaints in recent months that leveled sexual assault allegations against Combs.

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The U.S. Department of Homeland Security said in March it had opened an investigation into the hip-hop star and searched his homes in the Miami area and in Los Angeles; it provided no details of the nature of the investigation.

Local television images of the search showed an armored vehicle and officers carrying rifles outside Combs’ Los Angeles home. Authorities detained some people at the property with their hands bound by zip ties.

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