Markets in brief
The week started with a volatile session as the indexes hovered from green to red throughout the day. The Dow managed to recover ending up slightly by 0.26%, the NASDAQ gained 1.63% while the S&P 500 advanced by 0.57%. The rebound in the technology sector has allowed the indexes to remain in positive territory as Facebook (+5.3%), Netflix (+4.8%), Microsoft (+2%) and Alphabet (+2%) all posted strong gains.
“Sentiment is negative, but we still didn’t see a flush. We almost needed to see at least a break of these lows to see some more fear in the market, more stop levels triggered,” said Keith Lerner, co-CIO at Truist Advisory Services. “In some ways, as much as most technicians want to see support held, in my view you almost need to see that [break] to get a more durable bottom.” April was the worst month for the Dow and S&P 500 since March 2020 while for the NASDAQ it was the worst month since 2008.
Investors were worried, awaiting the Fed’s decision and earnings from several big companies. Fears of a possible economic slowdown, persistently high inflation and an increasingly aggressive Fed continues to create insecurity in the markets. Strategists at JPMorgan Chase & Co., led by Marko Kolanovi, believe the index pullback has been so deep that a rebound may not be far away.
“We were used to a world with very low interest rates, but we are facing a new inflation paradigm and we have to get used to what a world with higher rates looks like,” said Mazen Issa. of TD Securities. According to him, the equity market “is also going through a transition cycle with the prospect of higher rates.” “No more free money! It changes a lot of things, causes distortions,” he summarized.
The indexes closed Tuesday session just above the balance; the Dow edged up 0.20%, the NASDAQ advanced 0.22% and the S&P 500 gained 0.48%. “The market remains very agitated, the VIX index is still around 30 points, there will be other big movements,” added the analyst, referring to the VIX index called “the index of fear” which testifies market volatility.
“There are real uncertainty and people have different opinions about what the market is going to do after the Fed raises rates and announces quantitative tightening,” said Karl Haeling.
“Some say the market is going to have a relief rally and some say the rate hikes are going to be really tough and the market is going to sell off. It’s a vast mix of points of view and uncertainties,” he concluded.
These upside moves come as markets eagerly await the outcome of the Fed meeting. “For the first time in several days, sellers appear exhausted, and shorts are a bit more nervous than longs (there aren’t many people who feel ‘the’ bottom is in, but even bears are anxious about a sharp rebound rally),” Adam Crisafulli of Vital Knowledge said in a note to clients.
The earning season continued on Tuesday, with 80% of the companies that make up the S&P 500 index reporting better-than-expected results so far. For example, Pfizer (+2.01%) announced on Tuesday that it had recorded a turnover of 25.7 billion dollars, an increase of 77% over one year.
Airbnb filed better-than-expected results on Tuesday, revealing more than 102 million room nights and activities (also called “experiences”) booked in the last quarter, its best numbers so far. These results “reflect the return of tourism, with Airbnb gaining market share, supported by the efficiency of its platform model,” reacted, in a note, Baird analysts. Its share took 5% during trading after the markets closed.
On the other hand, Expedia, which is part of the NASDAQ, fell 14.02% after announcing losses of 122 million dollars, despite having doubled its turnover in the last quarter.
All three major indexes closed Wednesday session up sharply as investors reacted well to news of a rate hike announced by the U.S. Central Bank (Fed). The Dow jumped 932.27 points, or 2.81%, to close at 34,061.06. The S&P 500 advanced 2.99% to 4,300.17 points while the NASDAQ gained 3.19% to 12,964.86 points.
“It’s party time in Wall Street, bond yields are falling. Finally, the Fed was not as “hawkish” as expected,” commented Joe Manimbo of Western Union. “This is revealed in the fact that the Fed appears to be ruling out a 0.75 percentage point hike” in the future, the analyst noted. Markets were ready for the Fed hike, which is why all three indexes racked up gains following the announcement.
Investors showed enthusiasm for the Fed’s confidence in the US economy. Stocks that are often seen as economic indicators all posted gains: Home Depot (+3.4%) and Caterpillar (+4.2%), Citigroup (+4.3%) and JPMorgan Chase (+3, 3%). The story was similar for tech stocks as Apple and Alphabet gained more than 4% each. The thirty stocks from the Dow rose and the eleven sectors of the S&P ended in the green, in short it was a good session for the markets.
A day after their best sessions since March 2020, the indexes recorded their worst day on Thursday, completely erasing their gains recorded on Wednesday. The Dow fell 1,063 points, or 3.12%, to close at 32,997.97. The NASDAQ fell 4.99% to end at 12,317.69 while the S&P 500 fell 3.56% to 4,146.87, marking its second-worst day of the year.
“If you go up 3% and then you give up half a percent the next day, that’s pretty normal stuff. But having the kind of day we had yesterday and then seeing it 100% reversed within half a day is just truly extraordinary,” said Randy Frederick, managing director of trading and derivatives at the Schwab Center for Financial Research.
The sell-off from Thursday continued on Friday as stocks opened lower; the Dow and the S&P 500 were both down 0.6% while the NASDAQ lost 0.7%.
Oil
After ending slightly higher on Monday, black gold was down about 2% the next day. The market remains volatile, evolving to the rhythm of more and more news.
“With rising interest rates, inflation, supply issues, there are more concerns that beyond China, economic growth may be weaker than expected a few more weeks ago,” explains Michael Lynch, president of Strategic Energy & Economic Research (SEER).
Indeed, earlier this week, the announcement of a European embargo on Russian oil put pressure on investors. In its effort to decrease its funding to Russia, the EU must be cautious about this decision given that Russia exports two thirds of its oil to the EU member country.
“It will be a total embargo on all Russian oil, delivered by sea or via pipelines, crude or refined,” explained Ms. Von der Leyen, President of the European Commission. “It won’t be easy, because some member states are heavily dependent on Russian oil. But we have to do it. Putin must pay the price, and the high price, for his brutal aggression. »
Germany, which has been trying for several months to reduce its dependence on Russian oil, announced this week a drop in its imports from 35 to 12% in recent weeks.
Oil was back up on Wednesday as the barrel of Brent from the North Sea, for delivery in July, advanced by 4.92% to end at 110.14 dollars while the barrel of American West Texas Intermediate (WTI) for delivery in June, took 5.27%, to 107.81 dollars. The announcement of a possible embargo has put pressure on supply while stocks are already down.
“To the extent that unanimity is required (to adopt the project), it is likely that this will result in a very watered-down version, given the current position of Hungary,” estimated, in a note, Bjornar Tonhaugen, analyst at Rystad Energy.
Members of OPEC and its allies announced on Thursday that they would increase oil production by 432,000 barrels a day for the next month, despite a possible drop in demand from China, which is still struggling with a resurgence of COVID cases.
Fed
The Fed announced on Wednesday a half-percent hike in its key rates, its largest hike since 2000, announcing the possibility of another increase in the next two meetings, June 14–15 and June 26 and July 27.
The war in Ukraine as well as the lockdown in China has destabilized global economies, increasing pressure on inflation. The Central Bank also announced that it would reduce its balance sheet at the rate of 47.5 billion dollars per month from June 1 and up to 90 billion after three months, thus allowing it to increase the cost of credit for temper demand and price increases.
“Inflation is much too high and we understand the hardship it is causing. We’re moving expeditiously to bring it back down,” Fed Chairman Jerome Powell said during a news conference, which he opened with an unusual direct address to “the American people.” He noted the burden of inflation on lower-income people, saying, “We’re strongly committed to restoring price stability.”
Powell said only moves of 50 basis points “should be on the table at the next couple of meetings” but he seemed to lower the likelihood of the Fed getting more hawkish. “Seventy-five basis points is not something the committee is actively considering,” Powell said, despite market pricing that had leaned heavily towards the Fed hiking by three quarters of a percentage point in June. “The American economy is very strong and well positioned to handle tighter monetary policy,” he said, adding that he believed the U.S. economy was strong enough to handle rising interest rates.
The president thus believes that the next increases should not precipitate the country into a recession or a rise in the unemployment rate. Powell’s bet is that by restraining demand, combined with higher interest rates, the Fed will be able to stabilize rising prices.
Many analysts believe, however, that central bank interventions, especially the Fed, have been too slow to respond to rising inflation.
“We now have the worst of both worlds; not just inflation on the one side or stagnation on the other, but both of them together,” Macleod is recorded as saying in the British House of Commons, where he was finance critic. “We have a sort of stagflation’s situation,” he said. “And history, in modern terms, is indeed being made.”
Indeed, when stagflation swept through the United States and Canada in the 1970s, many blamed the sudden increase in oil prices by OPEC, pushing already high inflation even higher, thus destabilizing the economy. Economists have always maintained that this would not happen again as countries are now better prepared for these sudden shocks. This time around, it is not just oil prices that are at the centre of the problem, but the price of basic commodities. The pandemic, confinements, the war in Ukraine … there are many risk factors. “It’s been a series of inflationary shocks that are really different from anything people have seen in 40 years,” said Powell. “And it’s obviously going to be very challenging.”
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