Global risk appetite sharply deteriorated this past week as the Volatility Index (VIX), which is the market’s preferred ‘fear gauge’, closed at its highest since early December. The Nasdaq 100 dropped 7.5%, the most since March 2020 when markets were in the midst of the pandemic-induced selloff. S&P 500 and Dow Jones futures sank 5.81% and 4.67% respectively.
All things considered, it was a week that was lacking in economic event risk, aside from earnings data. This likely allowed traders to focus on broader fundamental themes. The most immediate item threatening market sentiment is a hawkish Federal Reserve. A combination of quantitative tightening and rate hike bets are bringing up front-end Treasury yields, or the ‘risk-free’ rate.
Unsurprisingly, the haven-oriented US Dollar and Japanese Yen were benefactors this past week. This is as the sentiment-linked Australian, New Zealand and Canadian Dollars underperformed. Gold prices received a slight boost but were undermined by a stronger Greenback. Crude oil, which can be sensitive to market mood swings, gave up gains earlier in the week, finishing flat.
A lot of focus is being placed on the growth-oriented tech sector, which has seen the bulk of gains since the global pandemic started. Now, monetary policy tightening and reopening threaten reverse capital flows from the sector, leaving the riskiest of investments vulnerable. This also includes cryptocurrency, with Bitcoin trading back under US$40k for the first time since August.
Still, even value-oriented shares were unable to escape binary moves in the market. Financial companies, which can benefit from higher profit margins amid rising interest rates, underperformed. The Fidelity MSCI Financials Index ETF suffered the worst weekly drop since June 2020. This equivalent industrial ETF sank almost 5%, the most since January 2021.
All eyes are on tech earnings after Netflix’s stock was wrecked by dismal subscriber growth projections. Apple, Microsoft and Tesla are due to report. Some traders argue that a turnaround in sentiment could spell a less hawkish Fed ahead of the January rate decision this week. But, inflation remains well above target and unemployment is relatively low. The BoC is also ahead as Australia and New Zealand release CPI figures. What else is in store for markets ahead?
US DOLLAR WEEKLY PERFORMANCE AGAINST CURRENCIES AND GOLD
The US stock market is embracing the peak of the earnings season this week, with about 22% of the S&P 500 companies due to announce results. Among them, Apple, Tesla and Microsoft will be closely eyed.
Gold Prices are looking to rise for a third consecutive week as market volatility and geopolitical tensions support bullion. It may be a volatile one for XAU, with a FOMC announcement and PCE data on tap.
Bitcoin volatility returned with vengeance Thursday as BTCUSD took out important support and traded back at lows last seen nearly six months ago.
The Pound has been rather impervious to allegations of lockdown parties in Downing Street but cracks in Sterling are beginning to show.
The Federal Reserve interest rate decision may sway the near-term outlook for USD/JPY as the central bank prepares to normalize monetary policy.
US Dollar is trading just below the yearly open with all eyes on the FOMC next week for guidance. The technical levels that matter on the DXY weekly chart.
Stocks are reeling and looking the worst they have in quite some time; there are some key levels getting broken that open up for more trouble.
Oil prices could come under pressure in the coming days if the Fed remains overly hawkish at its January meeting and causes a deeper pullback in the stock market and risk assets in general.
Bullion came into its own this week after U.S. Treasury yields slid lowering the cost of holding the non-interest bearing metal, while XAU/USD finally breaks 1830.