Stock Gains Ignore Powell’s Slightly Hawkish Remarks: Global financial markets experienced significant volatility following statements
by Federal Reserve Chairman Jerome Powell regarding expectations for interest rate cuts.
Despite Powell’s caution in his remarks, US stocks managed to post slight gains by the end of trading sessions.
Below are the details of the fundamental market movements. Contents
In the final moments of US trading, stocks gained even though Powell clarified
that the Federal Reserve was not in a hurry to make additional interest rate cuts.
Powell confirmed that rate cuts will happen “over time” and emphasized that the US economy remains strong.
Strong-Performance-by-the-S&P-500
The S&P 500 index closed the third quarter with an increase of more than $2.5 trillion,
marking the most extended quarterly gains since 2021.
At the same time, the Nasdaq 100, which focuses on the technology sector, achieved a similar performance.
Market Outlook for the Fourth Quarter
Emily Bowersock Hill from Bowersock Capital Partners believes
that the bull market will remain strong until the end of the year,
driven by rising earnings, falling interest rates,
and continued consumer spending.
She expects the fourth quarter to resemble the third in terms of volatility but with a strong finish.
Bond Market and Rising Yields
After Powell’s statements, the US bond market trimmed its historic gains.
Treasury yields rose, with the two-year note being traded at 3.64%.
Nevertheless, US bonds returned 1.4% this month.
Future Challenges and Risks
While investors await further economic data to clarify expectations for interest rate cuts,
they must contend with several challenges,
such as rising tensions in the Middle East and potential strikes by US port workers.
Global Stock Movements
European stocks fell by 1% after Stellantis cut its profit margin forecast.
Meanwhile, Chinese stocks saw a significant rise, supported by an economic stimulus package.
The CSI 300 index jumped 9.1%, the most significant increase since 2008.
Stock Fluctuations in the Last Minutes of the Big Options Day: U.S. stocks lost momentum by the end of Friday’s session as the positive sentiment following
the Federal Reserve’s half-percentage-point interest rate cut faded.
Expiring derivatives contracts and significant rebalancing contributed to increased market volatility.
After fluctuating between gains and losses in the final minutes of trading,
both the S&P 500 and Nasdaq 100 indices ended the session down by 0.2%,
with the broader index setting a new record high for 2024.
Meanwhile, the Dow Jones Industrial Average gained 0.1%,
setting a record closing level.
More than 20 billion shares were traded on U.S. exchanges,
marking the busiest session since January 2021.
Quarterly “Triple Witching” Event
Friday saw the quarterly “Triple Witching” event,
where $5.1 trillion worth of stock, index options, and futures contracts expired,
according to an analysis firm Asym 500 estimate.
An additional $250 billion in index trades were also absorbed.
This event is known for causing sudden price movements as traders renew existing positions or open new ones.
Stock Fluctuation
Despite U.S. stocks extending gains for the second consecutive week,
disappointing earnings reports weighed on the market. FedEx Corp. shares fell 15% after missing profit expectations and warning of a business slowdown.
Meanwhile, Lennar Corp.’s stock dropped after quarterly home orders fell below Wall Street estimates. Among the gainers was Intel Corp.
after a report hinted at a possible acquisition by Qualcomm.
At the same time, Constellation Energy Corp.
the largest U.S. operator of nuclear reactors
reached a record high with plans to restart the Three Mile Island reactor.
The Federal Reserve
Confidence is growing that the Federal Reserve will manage a soft economic landing,
though warnings like those from FedEx highlight ongoing concerns.
Federal Reserve policymakers expect an additional half-point cut this year. Krishna Guha of Evercore ISI wrote,
“It is unlikely that the continuous risk rally will persist amid
the uncertainty that may occur during the election.”
He added, “Investors should consider the gains after
the Federal Reserve’s decision as an initial boost,
with further gains to come after Election Day.” Guha believes that another half-point cut could be possible
if labor or inflation data comes in weak. Gold hit an all-time high as traders considered
the possibility of further monetary easing from the Federal Reserve.
Differing Viewpoints
Traders also weighed the differing perspectives of Federal Reserve officials
regarding consumers’ purchasing power.
Christopher Waller told CNBC that positive inflation data convinced
him to support the half-point rate cut.
Meanwhile, Michelle Bowman, the sole dissenting voice on the large rate cut,
expressed concern that the move might declare victory over inflation too early. At the same time, JPMorgan CEO Jamie Dimon expressed
skepticism about the world’s largest economy avoiding a recession during slowing growth. Dimon said at an event, “I hope that’s true,
but I’m also more skeptical that inflation will disappear that easily,
not because it hasn’t dropped – it has – but because it may drop further.”
Bonds and Gold
Gold traded above $2,600 an ounce,
extending its gains after an Israeli strike on the outskirts of Beirut.
At the same time, the U.S. dollar index rose,
while Treasury bond performance varied. Michael Hartnett of Bank of America believes
that the optimism in stock markets following the Federal Reserve’s
the decision could increase bubble risks,
making bonds and gold attractive hedges against a recession or renewed inflation. He added that stock markets are now pricing in more monetary easing,
with expectations for S&P 500 company profits to increase by 18%
by the end of 2025.
Hartnett wrote in a note, “Risks don’t get much better than this,
so investors are forced to chase the rally.” He also noted that non-U.S. stocks and commodities were good ways
to deal with a potential soft economic landing,
with the latter acting as a hedge against inflation.
International stocks are cheaper and outperform their U.S. counterparts.
New Data
Investors will receive fresh data next week on the Purchasing Managers’ Index (PMI),
Gross Domestic Product (GDP),
and the Federal Reserve’s preferred inflation gauge (PCE).
Several Federal Reserve officials, including Raphael Bostic and Austan Goolsbee,
are also scheduled to give speeches.
The Dollarstarts 2024 withitsbestdaysince March: The Bloomberg Dollar Spot Index increased 0.7%, the highest since March 2023 while the U.S.
stock and treasury bonds decreased. Investors have reduced their predictions about how much the Federal Reserve will cut interest rates in 2024.
It was the dollar’s strongest daily rise since last March’s regional banking crisis.
Such a good start to 2024 comes after last year’s volatility when the dollar’s performance was largely driven
by speculation surrounding when major central banks would cut key interest rates – and by how much.
The currency fell 2.7% last year, the worst annual performance since the Covid-19 pandemic swept the world in 2020.
Federal Reserve Bank report
“The Fed’s expectations are still there, we just have to wait and see where things go,” said Brad Bechtel, global head of foreign exchange at Jefferies.
Traders are awaiting the report of the Federal Reserve meeting held last month, which is expected to be released today.
The report will include details of the meeting, in which the participants announced the end of the severe campaign they launched in support of increasing interest rates.
Data will also be released from the labour market this week, and these data will focus on the flexibility of the labour market, which is gradually slowing.
The dominance of the dollar
The dollar rose, outperforming more than 31 major currencies. While the dollar was the best performing, the Norwegian krone, Swedish krone,
and New Zealand dollar were the worst performing among the rest of the currencies in European markets.
The decline of the US currency in 2023 comes as a result of Wall Street intensifying its bets on the easing cycle,
but traders have begun to reconsider the monetary path, and central banks have indicated the possibility that the phase of rising interest rates has ended.
However, the banks will not easily give up the fight against inflation.
Helen Giffen, a spot foreign exchange trader at Money USA, said that the markets have not determined their condition for the new year.
The Federal Reserve will not cut interest rates next March. These are the prevailing expectations, and the meeting report will confirm these expectations.
The Dollar starts 2024 with its best day since March
The dollar price fell to its lowest level since July: Amid increasing bets on interest cuts and supporting economic reports, the dollar price continued to decline.
The dollar deepened its loss despite the most followed by the Federal Reserve Bank indicator showing a slight rise in prices,
which proves the central bank’s intention to reduce interest rates during the next year.
Paresh Upadhyaya, Director of Fixed Income and Currency Strategies at Amundi Asset Management, said:
“The process of the dollar’s decline has begun, provided that inflation does not rise again.
All data supports the market and its expectations of further lowering interest rates.”
As for the Bloomberg Dollar Spot Index, it fell by 0.3% on Friday to its lowest level since July, which led to its decline compared to the rest of the central indices.
As for the Swiss franc, it rose to its maximum degree in opposition to the USD since 2015.
At the same time, the euro and the Norwegian krone rose to their highest level since August.
Dollar volatility
The dollar rose rapidly in July, before falling in recent weeks, as economic data showed a decline in inflation
and a slowdown in labour markets in the strongest and largest markets in the economy.
The dollar’s decline continued in September after the Federal Reserve made it clear that it expects to reduce interest rates
next year after announcing that the interest rate hike campaign had ended.
According to the one-year risk reversal index, demand for options contracts that benefit from a rise in the dollar has fallen to the lowest level since July,
compared to contracts that gain if the dollar rises, which may indicate an additional decline in the coming year.
Goldman Sachs expects the currency’s value to fall by 3% during the new year.
it is important to note that the Federal Reserve’s caution contradicts the position of monetary policymakers at the European Central Bank,
which warns investors against anticipating and betting on imminent interest rate cuts. The price of the euro against the dollar rose by 3%.
Swiss franc
The Swiss franc rose to its highest level since 2015 against the dollar,
when the Swiss Central Bank decided to abandon the policy of containing the rise in the currency,
and the Swiss franc against the euro also reached its highest level in nine years.
The Swiss franc outperforms all currencies of the G10 countries,
due to the belief that the Swiss National Bank’s use and preference for the local currency will prevent the price of the franc from falling.
Patrick Harker, President of the Federal Reserve Bank of Philadelphia, recently said that the US central bank should start cutting interest rates, but not now.
While the market expects the monetary easing process to begin soon, economists expect the Federal Reserve to postpone the interest rate cut until the middle of next year.
The dollar price fell to its lowest level since July
