(Bloomberg) — There are clear signs markets are now in a risk-off mode as traders position for further downside before Wednesday’s FOMC minutes. That’s after US stocks saw their worst one-day fall for 2023 as trading resumed Tuesday following choppy triple witching actions ahead of the long weekend.

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Morgan Stanley says the S&P 500’s equity risk premium has now entered the “death zone” as risk-reward becomes unattractive relative to Treasuries.

The S&P 500 index lost over 2% on Tuesday, worst day of the year:

Read: Morgan Stanley’s Wilson Calls Time on Rally for Pricey US Stocks

Year-over-year growth on S&P 500’s 12-month forward EPS has become negative for the first time since January 2021:

The two-year Treasury auction tailed, with the highest reward rate since 2007. This, along with strong PMI data, sent Treasury yields higher:

The six-month correlation between US stocks and bonds has reached a 25-year high. A selloff in one asset will likely exacerbate moves in the other as the impact of diversification fades.

NOTE: Ernest Tsang is a markets producer for Bloomberg TV. The observations are his own and not intended as investment advice. For more markets analysis, see the MLIV blog.

–With assistance from Mark Cudmore.

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