MARKETS THIS WEEK

Wall Street sinks

Wave of selling continued to 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. The S&P 500 index closed at 4,117 down 2.5%, Nasdaq ended at 12,643, down 2.6% and the Dow was down 2.1% to close at 32,418. The Cboe Volatility index closed at 21.71 last week, its highest level since March 24, closed at 21.27 down 2%.

Among the influential losers were Apple down 2.7%, AT & T down 3.7%, McDonald down 0.9%, Meta down 3.9%, Tesla down 2.2% and Nvidia was down 2.1%

Rising yields

The Federal Reserve’s commitment to a ‘higher for longer’ approach to interest rates, combined with mounting concerns about the fiscal situation in the United States, resulted in the benchmark 10-year Treasury yield surging to 5% earlier this week. Elevated Treasury yields are perceived as an obstacle for stocks, partly because they compete with equities for investor interest. There is a prevailing concern among investors that yields may ascend even higher should the Federal Reserve double down on its hawkish stance at the central bank’s upcoming monetary policy meeting on November 1st.

Concerns Over Prolonged High-Interest Rates

With the U.S. Gross Domestic Product exhibiting a robust 4.9% growth rate in the third quarter and indications that the labor market remains exceptionally strong, any signals of overheating or the Fed’s perception of the necessity for additional tightening to curb inflation could potentially stoke increased market volatility. The Blowout GDP number surprised analysts who were forecasting recession. Yet by some accounts, the possibility that the economy may finally crack suggests that trouble is lurking once again.

It would be very surprising if consumption growth remains this strong in the fourth quarter, then there is room for higher rates and various other headwinds to start taking a bit more of a toll. Robust U.S. employment data the following Friday could act as a catalyst for further yield increases, especially if it strengthens the argument for maintaining higher rates to cool down the economy and avert resurging inflation. The Fed is taking a cautious approach, with the likelihood that they will maintain their current rate range at the upcoming meeting. 

Bitcoin maintains gains

Bitcoin maintained last week’s gain and held a range between $33,500 on hopes of potential approval of a Bitcoin exchange-traded fund (ETF) in the U.S. while simultaneously being unable to surpass $34,000 due to the Fed’s intent to maintain “higher-for-longer” interest rates. That poses a risk to riskier assets like Bitcoin.

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 narrowing ‘yield spread’ that reflects the difference in interest rates between short-term and long-term bonds 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. Gold is up 1.3% this week.

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 at $85.19 down 3.3%.

Currency roundup

Dollex:

The U.S. dollar reached a near one-week high against a basket of currencies due to fading investor appetite for riskier currencies. Lackluster corporate results raised concerns about the economic outlook, while rising Treasury yields further supported the dollar. The dollar index, which measures its strength against six rivals, was 0.4% higher this week, hitting its highest level in nearly a week at 106.5.


EUR/USD:

The euro’s decline persists, with a drop of 0.3% this week. EUR/USD currently stands at 1.0566. The European Central Bank (ECB) held its key interest rates steady, despite a sustained high inflation outlook. After a considerable duration of rate hikes, a pause is in line with market expectations, chiefly due to the substantial decline in inflation across the eurozone and Germany.

Furthermore, weak economic growth in the eurozone, with Germany officially in a recession, elevates the risk of further economic downturns. Should the ECB communicate a “hawkish pause” by emphasizing the ongoing fight against inflation and the potential for future rate hikes, the euro may hold or even strengthen against the US dollar.


USD/JPY:

The Japanese yen slipped below the critical 150 level against the U.S. dollar due to concerns about upcoming U.S. GDP data and an imminent Federal Reserve meeting. This situation has amplified the prospects of government intervention, especially since the yen breached the 150 level.

The BOJ faces unique challenges, with a key driver of yen depreciation being the disparity between domestic and U.S. interest rates. Pressure is mounting on the Bank of Japan to change its bond yield control as global interest rates rise. USD/JPY pair ended flat this week down 0.1%.


GBP/USD:

The British pound exhibits a slight dip this week, GBP/USD closed the week at 1.2123, a 0.3% decline. The UK labor market is losing momentum. The unemployment rate is rising. While wage growth remains high, it contributes significantly to inflation. Additionally, the PMI reports offer further proof of a sluggish economy.


USD/INR:

The Reserve Bank of India (RBI) is instructing local banks not to increase their positions in the non-deliverable forward (NDF) market in an effort to halt the rupee’s decline. RBI’s continued intervention in the foreign exchange market is expected to protect the currency from the influence of a strong U.S. dollar. While many emerging market currencies have suffered due to rising U.S. yields, the rupee declined 0.3% this week. Foreign inflows and RBI’s policy directly affect the pair.



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. Stocks will start to recover when the market believes that bond yields have peaked.



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