By John Meyer, financial consultant. Eurasia Business News, August 21, 2022
The New York Stock Exchange closed on Friday at half-mast, facing bond yield pressure, the rise of the dollar and the rise in oil prices. The all three indexes finished the week in the red. Most of the S&P 500’s sectors retreated. Fears of an aggressive rate hike by the Fed in September resurface.
According to final results, the Dow Jones index dropped 0.86% to 33,706.74 points, the tech-dominated Nasdaq fell 2.01% to 12,705.21 points and the broader S&P 500 index fell 1.29% to 4,228.48 points.
Wall Street first digested “comments from several regional Fed officials,” who insisted on the need to continue monetary screws to curb inflation.
The chairman of the regional branch of the St. Louis Fed, James Bullard, had stated Thursday that “lean at this stage, towards 75 basis points” for the next rate hike, in September.
The acceleration next month of the reduction of the balance sheet of the U.S. Federal Reserve (Fed), by ceasing to reinvest in assets, would further tighten financial conditions for companies and investors.
Will the key to the Fed’s messages be given at the Jackson Hole Central Bankers Symposium next week where Fed Chairman Jerome Powell is scheduled to give a speech on Friday ?
Will they send signals about future monetary policy as they have done in previous years? Will they insist on the need for a restrictive policy?
In the bond market, rates tightened to more than 2.97% from 2.88% the day before for 10-year Treasuries, the highest in a month.
Bond yields are rising around the world and that’s affecting equities. Funding investment projects through credit becomes more expensive. This adds pressure on economic growth.
In addition, the downward pressure on both the equity and bond markets came from Europe with the high inflation rates in July announced in the United Kingdom (+10.1%) and Germany (+7.5%).
The impact on the U.S. economy is that if Europe has so many inflationary pressures, they will last longer in the U.S.
Safe Haven Dollar ?
The U.S. dollar, a safe haven thanks to its privilege of reserve currency, jumped 0.55% for the index dollar and 0.46% against the euro. The greenback was at 0.9959 euros at a blast of parity, already reached on July 12 for the first time in 20 years.
Oil prices have gained ground, boosted by the European gas crisis. The barrel of US WTI has risen above $90.
Gas prices in Europe during trading on Friday jumped by more than 5% and exceeded $ 2,700 per 1,000 cubic meters, amid reports of the suspension of supplies via Nord Stream pipeline for three days due to the repair of the unit, according to data from the London ICE exchange.
A risk asset par excellence, bitcoin fell 9.39% around 20:30 GMT to 21,231 dollars. The cryptocurrency has lost more than $2,000 in the last twenty-four hours. Bitcoin and other cryptos are hit by the tightening of monetary policy by central banks in North America and Europe.
The Nasdaq, where many U.S. technology stocks are concentrated, riskier assets that are very sensitive to rate hikes, was the most affected by the downward pressure this pressure.
Meta (Facebook) stocks lost 3.84%, Alphabet (Google) stocks fell by 2.27% and Tesla stocks lost 2.05%. Worries about the supply of rare earth metals adds pressure on the perspective of electric vehicles and computing hardware manufacturers. Increased geopolitics pressure around Taiwan puts the supply chain of micro-chips and semi-conductors at great risks. Taiwan produces more than half of the world’s semiconductor needs, far surpassing Europe and the United States. Between them, they provide only 10% of the needs of the international market. Even Asian neighbors are far behind Taiwanese production.
As for Apple, which also discovered a security flaw on its iPhones and iPads that “may have been actively exploited” by hackers, the value of its stocks gave up 1.51%.
Vehicle maker Rivian slumped 4.04 percent to $34.45 after it said it was dropping production of its cheapest version of its pickup truck.
Oil group Occidental Petroleum jumped 9.88% to 71.29% while Warren Buffett (Berkshire Hathaway) got a regulatory green light to raise its stake to 50% in its capital.
The announcement by General Motors to redistribute a dividend and resume a share buyback program was well received by investors (+2.53%).
The highly speculative stock of the struggling home goods brand, Bed Bath and Beyond, collapsed 40.54% to $11.03 after the defection of one of its major shareholders.
Ryan Cohen, the boss of the video game store chain, GameStop, has divested himself of a stake of some 11.8% in the company. Earlier in the week, he had revealed his rise in capital, which made investors believe that he was going to be a long-term partner and doubled the value of the stock in a few days.
Some investors felt they were wrong and are calling for an investigation by the stock exchange’s policeman, the SEC.
Gold prices are up
Gold prices have been surging between January and April, amid geopolitical tensions and inflation worries in Europe and the United States. Since May, gold prices have been slowly declining, because of the rate hikes by the U.S. Federal Reserve, driving hopes amid investors of better performance of the U.S. dollar. On Friday at closure (04:59 PM NY Time), gold prices were $ 1,748.60 per troy ounce, after a day high of $ 1,759.
Gold prices are up +3.02% on the past 30 days.
Some investors now look at the dollar, as the U.S. paper currency is driven by bets that the U.S. Federal Reserve will announce aggressive rate hikes in September, after the hikes of March, May, June and July. Gold is indeed sensitive to rising U.S. interest rates, which increase the opportunity cost of holding the precious metal. But U.S. inflation is still high and we cannot know how long the U.S. economy will resist such pressure.
Indeed, the U.S. Consumer Price Index for All Urban Consumers (CPI-U) was unchanged in July on a seasonally adjusted basis after rising 1.3 percent in June, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index eased and increased 8.5 percent before seasonal adjustment. In June, the all items index had increased 9.1 percent. The U.S. food index increased 10.9 percent over the last year, the largest 12-month increase since the period ending May 1979. Such figures puts great pressure on the consumption in the U.S., as more and more American families have to weekly reduce their expenses.
Signs of weakness on the U.S. labor market have also been registered : in July 2022, only 55.3 percent of young people (persons ages 16 to 24) were employed, the U.S. Bureau of Labor Statistics reported on August 17. This measure was up from 54.4 percent in July 2021.
In addition, a movement of de-dollarization is underway worldwide, with great economies refusing or reducing the share of dollar for trade and funding (Russia, China, India, Brazil, South Africa, Iran, Turkey, if citing the main countries).
Read also : How to invest in gold
Nations like the United Arab Emirates, Myanmar, Russia and Iran have even sealed deals to conduct trade transactions with India in Rupees, not in dollars.
More central banks are questioning now whether reliance on the U.S. dollar is a good idea. This lower the value of dollar worldwide and increases the value of gold.
Gold is a good asset in tough times. In almost any crisis, it shows growth. The yellow metal has always been a great hedge against inflation because it rises in price when the cost of living standards rises.
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