Wall Street Ends Sharply Lower, Technical Levels Breached

Another wave of selling hit the stock market on Friday as both the S&P 500 and the Nasdaq breached key levels, resulting in a losing week for U.S. stocks. This decline came in the wake of the 10-year Treasury yield topping 5% for the first time since 2007. The S&P 500 index closed below its 200-day moving average for the first time since March 17. Some analysts consider this as a bearish sell signal. Meanwhile, the tech heavy Nasdaq, ended below the 13,000 level for the first time since May 31.

For the week, the Dow was down 1.6%, the S&P 500 fell 3% and the Nasdaq slid 3.2%. The Cboe Volatility index closed at 21.71, its highest level since March 24. Among the influential gainers were Netflix(Nasdaq:NFLX) +12.7%, AT & T (NYSE:T) +7.1%, McDonald (NYSE:MCD)+4% and Coca-Cola (NYSE:KO) +3.2%. Influential losers were Tesla (Nasdaq:TSLA) -15.6% and Nvidia(Nasdaq:NVDA) -9%

Rising Interest Rates and Strong U.S. Dollar

Rising interest rates and a robust U.S. dollar have posed significant headwinds for stocks. The relentless climb in Treasury yields, which reached 5%, has raised concerns among investors. Some believe that the bond market selloff has more room to run. As the Federal Reserve shows no signs of deviating from its “higher for longer” stance. Stocks sold off on Thursday, with the S&P declining by 0.85%. This suggests that the market is not anticipating a swift intervention by the Fed. As a result, market participants feel that rates could rise above 5.5%.

Concerns Over Prolonged High-Interest Rates

The extended climb in Treasury yields raises concerns about the impact on various assets. U.S. government bonds are on track for a third consecutive year of losses, while the S&P 500 has retreated by 7% from its peak in July. The market’s focus now lies in how long 5% interest rates or higher will persist and what impact this might have on the broader economy.

The Fed has noted the rise in the “term premium,” an additional compensation that investors expect for owning longer-term debt. It is seen as a reason why the Fed might have less need to raise rates, as higher yields and broader financial conditions have already helped cool inflation. The Fed is taking a cautious approach, with the likelihood that they will maintain their current rate range at the upcoming meeting. 

Bitcoin surges amid conflict

Bitcoin’s price had become stagnant, fluctuating between $28,000 and $26,750, as trading volumes and price volatility dwindled. This indicated a growing disparity in market sentiment. The potential approval of a Bitcoin exchange-traded fund (ETF) in the U.S., is expected to inject substantial demand and boost Bitcoin’s price. While the U.S. Federal Reserve’s intent to maintain “higher-for-longer” interest rates, poses a risk to riskier assets like Bitcoin.

Simultaneously, deep-pocketed traders and investors are believed to be accumulating Bitcoin off-market. The unexpected 3.8% price surge this week occurred amid the Israel-Hamas conflict, prompting discussions about cryptocurrencies as potential safe havens during crises. This surge could drive Bitcoin prices toward $33,000, likely by late 2023 or early 2024. Currently Bitcoin trades close to $30,000.

Gold in demand

The conflict between Israel and Hamas in the Middle East has been one of the catalysts driving up gold prices towards $2000 and above. The ‘yield spread’ reflects the difference in interest rates between short-term and long-term bonds. When the yield spread narrows, it usually means that the yield on the 2-year bond is approaching the yield on the 10-year bond, which may be interpreted as a signal of potential economic changes, such as an impending recession. This too has created concerns leading to a frenzied gold buying as gold is seen as a safe haven during such a crisis.

Oil prices firm

The Israel-Hamas conflict is the key reason for the increased volatility in the oil prices. The proximity of the conflict to major oil-producing countries and concerns about a broader conflict, are contributing to a risk premium in oil prices. Other factors like U.S. stockpile reductions, statements by the Federal Reserve Chair and the U.S. granting Venezuela a waiver from oil trade sanctions may dampen the oil price rise. This week WTI crude closed flat at $88.3, still up 10% + since the conflict began.

Market Uncertainty

Impact of rising interest rates and technical breaches in key indices shows the market remains cautious, balancing concerns over economic growth and monetary policies. The Israel-Hamas conflict has elevated gold, crypto and oil prices.  However a clear trend is not visible in either of the three yet.

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