MARKETS ON BACK FOOT

Volatile August

August has proven to be a challenging month for the U.S. stock market, with the S&P 500 experiencing a decline of 5.6% over a span of 15 trading days. This decline, while significant, falls within the realm of typical August volatility, which often witnesses heightened market turbulence due to factors such as low trading volume towards the end of the summer vacation season. Concerns regarding China’s economic data and property-related challenges have also contributed to market unease. Stock markets ended the week lower while commodity prices were mixed. The US dollar rose against most major currencies. Crypto lost ground.

 

Factors influencing market sentiment this week

· Rising inflation

Elevated inflationary pressures persisted in the US throughout July, culminating in a four-decade peak of 9.1%. Apprehensions have arisen regarding potential imperatives for a more pronounced tightening of monetary policy by the Federal Reserve, with implications for the modulation of interest rates to counterbalance the probable slowdown of economic growth.

 

· Economic slowdown and property defaults in China.

China’s economy has exhibited signs of deceleration. Caterpillar Inc  experienced a drop of over 2%, driving down the industrial sector. This decline was prompted by sluggish growth in China, a significant market for the company’s heavy equipment, which raised concerns about demand. The Chinese government’s steadfast adherence to a zero-COVID policy has introduced complexities in economic normalization.


Concurrently, the real estate sector confronts mounting default occurrences among prominent developers. The housing market continued to cool, with new home sales falling from a year earlier in July. The real estate sector is in a state of crisis. In addition, there have been several high-profile property defaults in China in recent months, including China Evergrande Group, Kaisa Group, Fantasia Holdings, and Country Garden. The property defaults have raised concerns about the stability of China’s financial system. The latest data from China shows that the trade deficit has gone up.


The Chinese government is taking some measures such as to stimulate the economy. PBOC announced a 25 bps rate cut, but whether these measures will prevent a recession and a broader financial crisis remains to be seen.

 

· War in Ukraine

The war in Ukraine is still ongoing, and no end is in sight. The war has led to uncertainty about the global energy and food markets.


 

Volatility Returns in Bitcoin

After a period of stability, Bitcoin’s price surged to a yearly high of $31,818 in July. However, recent spikes in bond yields and increased nervousness surrounding riskier assets have caused significant volatility for the cryptocurrency. Bitcoin experienced a sharp decline of over 7% on Friday.

Adding to the negative sentiment was a Wall Street Journal report indicating that SpaceX, owned by billionaire Elon Musk, had devalued and subsequently sold its Bitcoin holdings, amounting to $373 million in losses. Musk, who has been vocal about the crypto market, has been closely followed by the crypto community in recent years.

The timing of Bitcoin’s drop is concerning as regulatory scrutiny intensifies for companies associated with cryptocurrencies. U.S. regulators are taking action against the industry due to fears of widespread fraud and scams. This environment has led to legal challenges for major crypto exchanges like Binance and Coinbase, both of which are facing lawsuits from the Securities and Exchange Commission (SEC).



What we think

These factors weighed on global growth and commodity prices. Our call remains to stay in cash. The markets will likely remain volatile in the coming weeks as investors continue to grapple with these challenges.


For more insights and analysis, visit Uptrendpicks.com

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