Fed hikes, and the market loves it!
Is this the end of the bear market?
The US Federal Reserve hikes interest rates by 0.75%, and warns of the need for more rate hikes to slow down the labour market further, and what did the market do? It rallies hard, with the Nasdaq index rising more than 4%, the best daily performance since 2020.
What gives? When Fed Chair Powell said policy rate is “in the range” of what the committee considers as neutral, the market which was already doing well after the less bad than expected earnings of Alphabet and Microsoft was off to the races.
Is this the end of the bear market? That remains to be seen, but a short-term bottom is likely to have been formed. If the US inflation data on Friday is benign, the market is going to test higher levels from here.
A word of warning though, Powell did say the Fed projections (the dots plot) is still the best guidance of what the committee’s projections are as it is still only 6 weeks old, and not much has changed since.
The dot plot shows a median projection of 3.75% policy rate at the end of 2023. The market currently prices for a peak of 3.32% at the end of 2022 before heading lower, expecting the Fed to cut interest rates as the economy slows. That’s quite a big discrepancy between the Fed’s projections and market prices. This is because the market is now obsessed with the threat of a recession and inflation fears have receded.
Should inflation rear its ugly head again, risk assets will likely have another leg lower. Until then, the happy mood is likely to prevail.
Trading Tip
It is okay if you do not understand
There are always events and novel ideas being presented everyday and they may not be easy to understand. Be it market events or new projects in the crypto space. Sometimes things are just inexplicable due to the imperfect and incomplete information we have. And sometimes this may be intentional.
Not understanding such things should also mean that we should not trade or get invested in them. With the hype and attention for such events, it is inevitable that we start to feel the fear of missing out. However, we should note that there are always opportunities in future to get into that are clearer and more understood. Being invested now will take away your chances from being invested in other opportunities that may be better.
Day Ahead
US Advanced GDP for Q2 is expected to show a modest growth of 0.4% on a Quarter-on-Quarter basis.
Trading Plan
1. Currencies:
EUR - Short the EUR. EUR bounced as the USD weakened, but rallies should be sold.
2. Commodities:
Uranium & Energy - Stay invested.
3. Stocks:
US Stock Index: The US stock market is set to break higher as a short-term bottom seems to have formed. If the US inflation data tomorrow is benign, higher levels should be tested in the week ahead.
Single Stocks: TrackRecord Model Portfolio is tracking the broader market for now.
Key risks: US GDP data later today may change the market’s expectation of an impending recession. The Ukraine-Russia war rages on, but the market impact is limited for now.
What Happened Yesterday
In their policy meeting yesterday, the Federal Reserve hiked interest rates by 0.75% as expected, moving the benchmark overnight borrowing rate up to a range of 2.25% to 2.5%. The Fed cited that inflation remains high and that more rate hikes are needed to bring it down even though parts of the economy have softened except labour numbers which have remained relatively robust.
In his press conference, Fed Chair Powell said that the Fed is still looking for compelling proof that inflation is slowing. He acknowledged that the economy is slowing as intended and that another further large rate hike may be needed. He also added he does not think the US economy is in a recession as there are many areas of the economy that are still doing well. Interestingly, he said that the market should expect less forward guidance going forward.
US Treasury yields went lower following Powell’s press conference as he also said that the policy rate is now in the range of what the committee considers as neutral. The yield curve remains inverted. The 2-year bond yield fell -0.06% to 2.96% while the 10-year bond yield dipped -0.03% to 2.78%.
The US stock market traded higher after Powell hinted at a slowdown in the pace of rate hikes. The S&P 500 jumped +2.62%, Dow Jones rose +1.37% while the Nasdaq soared +4.26%.
Earnings from Etsy surprised markets at $0.51 vs. $0.31 expected despite tough economic conditions. Ford motors had a similar upbeat result as well with earnings of $0.68 cents vs $0.45 expected. Meta, the company formerly known as Facebook, reported disappointing earnings at $2.46 per share vs $2.59 expected. Meta CEO, Mark Zuckerberg, said that the company will be reducing headcount over the next year as it weathers the economic slowdown. The disappointing earnings stems from poor ad revenue as the advertising landscape remains challenging amidst stronger competition and ad privacy challenges.
The crypto market moved in tandem with the US stock market. Bitcoin jumped +8.1% to 22,958 while Ether leapt +12.8% to 1,636.
Headlines & Market Impact
Meta lost $2.8 billion on its virtual reality ambitions during Q2
Notable Snippet: Facebook parent Meta lost $2.81 billion on $452 million in revenue from its virtual reality division, Reality Labs, during the quarter ending in June as it forecast a second consecutive quarter of declining revenue on Wednesday.
It’s a substantial but affordable expense to a company that earned $8.36 billion in operating income on $28.82 billion in total sales during the quarter.
Zuckerberg and other Meta leaders believe that virtual and augmented reality headsets will be the major next-generation computing platform and are willing to spend heavily on technologies that might be years out and prototypes that aren’t ready to be released, as well as a substantial staff of technical experts, in order to compete with Apple, Google, Microsoft, and other companies eying the industry.
What we think: The metaverse and virtual reality are still in their infancy and patience is required before anything can be pulled off. More developments are needed on both ends for any substantial impact on the world.
Biden’s call with Xi Jinping will focus on areas of U.S.-China cooperation, not just tension
Notable Snippet: “There is an awful lot in the bilateral relationship between the United States and China for these two leaders to talk about,” said National Security Council spokesman John Kirby, noting that the call would take place “in the coming days” and would be Biden and Xi’s 5th leader-to-leader conversation.
As rising tensions between Washington and Beijing dominated news headlines, Kirby insisted that there was an inherent value in holding a call, even if Biden and Xi did not resolve any of their myriad issues of disagreement.
“That’s the key thing: The president wants to make sure the lines of communication with President Xi remain open, because they need to,” said Kirby.
What we think: While most headlines are focused on the tensions stemming from Pelosi’s possible visit to Taiwan, we should also note that both parties have an interest in resolving problems in their own economies. The US wants to reduce inflation while China wants to boost its growth which can be done through exporting more.
Meta and others tumble after hours as results point to weak economy
Notable Snippet: Shares of several major U.S. companies tumbled in extended trade on Wednesday following poor quarterly results and forecasts that underscored fears about a potential recession.
Meta Platforms (META.O) fell over 3% after the Facebook owner posted its first-ever quarterly drop in revenue and issued a gloomy forecast, echoing a warning last week from ad tech rival Snap (SNAP.N). read more
Qualcomm (QCOM.O) dropped more than 2% after offering a fiscal fourth-quarter revenue forecast that missed analysts' expectations as the mobile chipmaker braces for difficult economic conditions and a slowdown in smartphone demand.
Most of the Nasdaq's gains came after the U.S. Federal Reserve raised interest rates by 75 basis points, as expected. Some investors viewed comments by Fed Chair Jerome Powell as signalling the Fed's fight to tame decades high inflation could be done by year-end.
What we think: The outlook for the US economy remains bleak as interest rates rise further. It remains to be seen if a recession can truly be averted as inflation remains stubbornly high.
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Best,
Phan Vee Leung
CIO & Founder, TrackRecord