U.S. shares struck new highs for the year on Friday and helped lift world stocks to a 13-month peak, as rising bets that the Federal Reserve will skip a rate hike next week overshadowed worries about U.S. markets being drained of cash.
Surging enthusiasm for technology giants building consumer products based on artificial intelligence catapulted the US benchmark S&P 500 into a technical bull market on Thursday. On Friday, the blue-chip bellwether index was up more than 20 per cent from its lows and is at its highest level since August, with the tech-heavy Nasdaq index chasing seven straight weeks of gains to soar 27.4 per cent year to date.
“As of today, the S&P 500 is back in a bull market,” said Arthur Hogan, chief market strategist at Briley Wealth, noting that the index finished Thursday with a 20% gain off its recent lows. “The one thing that could tip over the apple cart is an over-aggressive Fed.”
“It’s maybe the most hated bull market in the history of bull markets,” said Tim Holland, chief investment officer of investment platform Orion OCIO.
“Sentiment was terribly depressed going into year-end and still remains on the bearish side.”
And just remember how narrowly based this surge is though as hot money seeks a home in an uncertain world.
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U.S. stocks closed higher on Friday after a labor market report showing moderating wage growth in May indicated the Federal Reserve may skip a rate hike in two weeks, while investors welcomed a Washington deal that avoided a catastrophic debt default with the Senate passing a bill late on Thursday to lift the government’s $31.4 trillion debt ceiling avoided what would have been a catastrophic, first-ever default.
As an old TV show “Soap” used to say – confused? You will be… and this is certainly appropriate for the current complex market dynamics. The market has been rallying since October last year, hoping the Fed would pause its rate-hiking campaign and start cutting rates in the latter half of this year.
“With this broadening rally, #markets are embracing another upside surprise on the #economy,” Mohamed El-Erian said in a tweet. “Underlying this is a lower risk of recession. Indeed, and as I’ve argued before, there is no need for the economy to fall into recession unless it is hit with another Fed policy error.”
But the bullish case hinges upon the economy avoiding a recession, Employment remaining strong, and wages supporting consumption, elevated corporate profit margins supporting higher market valuations and the Fed will “pause” the tightening campaign as inflation falls.
Yet if the economy avoids a recession and employment remains strong, the Fed has no reason to cut rates. Sure, the Fed may stop hiking rates, but if the economy is functioning normally and inflation is falling, there is no reason for rate cuts.
And sustained economic growth and low unemployment will keep inflation elevated, leaves the Fed little choice but to become more aggressive in tightening monetary accommodation further.
Two other factors to also consider are first the narrow base of the current rally, the mirror image of last year when big tech was on the nose, now investors holding shares of the massive tech and growth companies leading the charge are debating whether to cash out or stay on for the ride. And second the lag effect of past rate rises, which typically take 18-24 months to work though to the real economy, and the split performance of goods and services inflation and potential impact.
A record $US8.5 billion flowed into tech stocks in the latest week, data from BofA Global Research showed, as investors piled into a rally that has seen the tech-heavy Nasdaq 100 gain 33 per cent in 2023. The benchmark S&P 500 has risen 11.5 per cent this year and stands at a 10-month-high. Big movers include shares of Nvidia, which are up about 170 per cent this year, while Apple and Microsoft, the top two US companies by market value, have both climbed nearly 40 per cent.
The S&P 500 advanced for a third week in a row, powered to the brink of a bull market by a handful of tech behemoths such as Nvidia, Alphabet and Microsoft. The Nasdaq 100 jumped 1.8 per cent, capping a sixth straight weekly gain. The tech-heavy Nasdaq index surged to a 13-month intraday high and posted its sixth-straight week of gains that marked its best winning streak since January 2020. Underneath the surface, value shares lagged growth in a seventh week of underperformance.
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US stocks rose broadly in their last trading day before a long weekend, despite painfully slow progress on debt ceiling negotiations and disappointing inflation data. Chip stocks surged for a second straight day on optimism about artificial intelligence.
Investors were closely watching debt ceiling talks as Biden and McCarthy still seemed at odds over several issues heading into the long weekend, with the U.S. stock market closed on Monday for the Memorial Day holiday. but strategists warned there was still a prospect of a sell-off if debt ceiling negotiations break down. Any agreement would have to pass the Republican-controlled House of Representatives and the Democratic-controlled Senate, with the June 1 deadline fast approaching.
The S&P 500 climbed 1.30% to end at 4,205.45 points. The Nasdaq gained 2.19% at 12,975.69 points, while Dow Jones Industrial Average rose 1.00% to 33,093.34 points. This means the Dow Jones Industrial Average ended a five-day losing streak, while the Nasdaq Composite Index and S&P 500 closed at their highest levels since August 2022, with the S&P 500 above 4,200 points. And for the week, the S&P 500 rose 0.3%, the Dow fell 1.0% and the Nasdaq jumped 2.5%.
But Data showed U.S. consumer spending increased more than expected in April and inflation picked up, which could prompt the Federal Reserve to raise interest rates again next month. A measure of inflation most closely watched by Federal Reserve officials picked up in April, reflecting the difficult path ahead for economic policymakers as they weigh whether to raise interest rates again to bring down stubborn price increases.
CONTENT*
0:00 Start 0:15 Introduction 0:30 AI 1:24 Debt Ceiling Issues 3:00 US Markets 3:40 US Retail Sales 4:15 PCE Data Higher 5:00 Rate Hikes Coming? 7:20 Treasuries 7:40 Europe 8:20 UK Retail Sales 9:50 Asia 12:30 Oil 13:45 Gold 16:13 Australia 18:50 RBA To Lift Again 21:20 Crypto 22:05 Summary and Close
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The latest inflation figures from the UK showed that whilst headline inflation dropped a bit thanks to the base effects relating to energy a year ago dropping out, core inflation and services inflation were higher than forecast (again). Markets reacted pushing the cash rate expectations higher. Once again it appears the Bank of England are behind the curve.
New Zealand meantime lifted their cash rate to 5.5%, in a market leading attempt to get inflation under control!
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Just a couple of days ago, markets bounced on the back of hopes talks on raising the US debt limit were in play, on growing confidence a deal to raise the $31.4 trillion debt limit could be reached in coming days, with the benchmark S&P 500 climbing more than 2%. But as this came to a sudden halt, the optimism that had been building through the week fell away. As a result, U.S. stocks ended lower and the dollar lost ground on Friday as the negotiations to raise the U.S. debt ceiling were put on hold, yet moving closer to the deadline to avoid default. Then reports were made suggesting talks had recommenced.
Initial reports that debt ceiling negotiations had reached an impasse rattled markets even as investors were scrutinizing Federal Reserve Chairman Jerome Powell’s remarks in a panel discussion for clues regarding next month’s interest rate decision. In his remarks, Powell said that uncertainties surrounding the lagging impact of past rate hikes and recent bank credit tightening made it unclear whether more monetary tightening will be necessary.
All this is creating febrile markets, where big players can trade the volatility. But others may be best on the sidelines!
CONTENTS
0:00 Start 0:15 Introduction 1:00 Debt Ceiling Impasse? 2:15 Powell On Inflation, Credit and Rates 6:24 US Markets 11:08 Europe and UK 13:40 Asian Markets 17:15 Gold 18:32 Oil 19:40 Australian Markets 21:20 Crypto 22:54 Summary And Close
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Market volatility continues, following falls earlier in the week, now we see a boost for US markets, as hopes of a debt ceiling resolution appears closer.
Plus there was more positive news on the Regional Banking issues.
That said, Fed Officials are still taking rates higher and earnings are looking weaker as consumers pull back, so recession is still a potential risk.
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The financial markets have been fighting the Fed since October of last year, especially since the start of this year, in two ways. The first involves bidding-up stock prices in anticipation of a ‘Fed pivot’, which is probably a self-defeating strategy. The second involves factoring lower interest rates into bond prices.
The backdrop is mounting economic uncertainty as Finance leaders of the Group of Seven (G7) nations warned on Saturday in a subdued end to a three-day meeting overshadowed by concerns about the U.S. debt stalemate and fallout from Russia’s invasion of Ukraine.
The gathering in the Japanese city of Niigata came as global policymakers – already preoccupied by U.S. bank failures and efforts to reduce reliance on China – are now forced to grapple with a potential default by the world’s largest economy. While the communique made no mention of the U.S. debt ceiling stalemate, it figured constantly in discussions.
U.S. stocks ended slightly lower on Friday, led by weaker megacap shares following their recent rally, as data showed U.S. consumer sentiment dropped to a six-month low. The Dow was barely lower in its fifth straight day of declines, the blue-chip index’s longest losing streak in two months.
May consumer sentiment dropped to its lowest since November. The University of Michigan’s consumer sentiment reading for May came in at 57.7, much lower than the 63 expected and down from 63.5 in April.
Treasury yields rose in the bond market following the consumer-sentiment report. The yield on the 10-year Treasury erased an earlier dip and climbed to 3.46 per cent from 3.39 per cent late Thursday. It helps set rates for mortgages and other important loans.
The risks are building, and recession is becoming more likely!
CONTENT
0:00 Start 0:15 Introduction 0:50 G7 Warnings 4:44 US Markets 6:50 US Consumer Sentiment Crashes 7:50 Bonds 9:15 Debt Default? 11:22 Europe 13:40 Oil and Gold 15:40 Asia 17:45 Australia 21:20 Bitcoin Halving 23:16 Summary and Conclusion
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