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Volatile Week & Possible 50bps Hikes

U.S. stocks closed higher on Friday, 13th May 2022, after another volatile week for financial markets. 

Federal Reserve Chairman Jerome Powell’s reassurance that rate hikes on the order of 75 basis points were off the table for now and has given some relief to the market. 

The sentiment was affected by the collapse of TerraUSD, when it lost its dollar peg and sister token Luna went to zero. One could argue the rise in stocks was attributed to a move from crypto to traditional financial instruments like stocks. The other contributing factor could have been the rise in Tesla after Elon Musk twitted that the deal to buy Twitter may be on hold.  

The most obvious to me, was the drop in 10yr yields on the back of short covering and flight to quality. The 10-yr yields below 3% was the shot in the arm and the Nasdaq needed to stage a rally. 

Unfortunately, Friday’s gains were not enough to erase all the losses for the week. 

The Dow Jones index ended with its seventh weekly loss in a row, marking its longest losing streak since 2001, while the S&P 500 fell 2.4% for its longest weekly losing streak since 2011, and the Nasdaq Composite dropped 2.8% 

 Here are the closing levels on Friday, 13th May 2022: – 

 Last Change %Change 
Dow Jones 32,196.66. +466.36. +1.47% 
S&P 500 4,023.89 +93.81. +2.39% 
Nasdaq Comp 11,805.00 +434.04. +3.82% 
US 10Y 2.92%   
VIX 28.87 -2.9 +9.13% 

On the face of it, Friday’s rally was quite significant. There is a 2.4% rise in S&P and a whopping 3.8% for the Nasdaq comp.  

Regardless, we have to bear in mind that we came from very low levels, and as I mentioned we still closed below for the week. 

Powell suggested that there could be 50bps hikes in the next 2 meetings and will adjust if needed. This means that if inflation is not under control, we could be seeing more 50bps hikes. 

Mohamed El-Erian on Bloomberg sees stagflation scenario for the U.S. Economy. He says we have to take the growth scares in China and Europe seriously and “notably low”. The U.S. economic growth will lag below the level needed to offset the impact of the ongoing inflation. 

It was good to have a relief rally on Friday, but I think it may be too early to bust out the Champagne. 

A lot of the positive sentiment came from the 10-yr yields falling back below 3%. While this is good, don’t expect it to stay that low until the Feds can reign in the high inflation we are experiencing.   

Source: CBOE, Bloomberg, Federal Reserve 

This commentary is written by James Gomes 
James has been in the finance industry for over 30 years and most recently worked for a large U.S. bank for more than 20 years. 

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