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Volatility Persists Amid Economic Challenges And Fed’s Stance 

U.S. stocks closed pretty much flat on Friday, 18th August 2023, with the DOW slightly up, S&P edging down and the Nasdaq down by 0.2%. 

The fall in stock prices this week was attributed to rising yields, economic challenges in China, and reduced liquidity due to summer vacations. 

Federal Reserve minutes released earlier in the week suggest that the Fed is not yet prepared to alter its stance of keeping rates higher for a longer period.  

Investors also anticipate that Powell will echo this sentiment at the Jackson Hole symposium this week. 

Retail sales figures earlier in the week came in at 0.7% better than the 0.4% expected. 

Interpreting this data, the market inferred that the Fed might have room for another rate hike. Swap prices projected an additional 50-basis point hike later in the year following the data release, causing bond yields to surge to levels unseen since 2007. 

However, yields managed to retreat on Friday due to profit-taking; some investors felt that the earlier week’s movements may have been excessive. 

Friday also marked the expiration of approximately USD 2.2 trillion worth of stock and index options, contributing to heightened volatility and likely explaining the late rally. 

For the week, the DOW closed down by 2.2%, the S&P down by 2.1% to an 8-week low, while the Nasdaq slid 2.6% to a 10-week low. 

Here are the closing levels for Friday, 18th August 2023: 

 Last Change %Change 
DOW JONES. 34500.66. +25.83. +0.07% 
S&P 500 4369.71 -0.65.   -0.01% 
NASDAQ 13290.78. -26.15 -0.20% 
U.S. 10Y 4.25%   
VIX  17.3 -0.59 -3.3% 

Another challenging week for stock prices has raised concerns that this downward trend may not be temporary. 

Although Nvidia’s strong earnings report could halt the selling or even prompt a rebound, the most plausible way to reverse this decline is likely a dovish statement from Powell during the Jackson Hole symposium. 

However, even this might not suffice, given that both the S&P and Nasdaq remain decidedly below their 50-day moving averages. The majority of technical analysts are labeling this as the commencement of a bearish trend. 

As predicted last week, the strategy of selling during rallies has proven effective and is anticipated to remain so unless we convincingly reclaim the 50-day moving average. 

Higher interest rates are now being acknowledged as detrimental to the economy, and consequently, to stock prices—particularly impacting the valuations of tech stocks. 

While we have observed the fear of missing out (FOMO) driving prices to yearly highs, a true reversal might necessitate capitulation, i.e., a surrender from buyers, before we can declare a bottom and initiate a renewed bull run. 

Until then, be prepared for substantial volatility, with the potential for further downside. 

Source: CBOE, Bloomberg 

This commentary is written by James Gomes, a seasoned finance industry veteran with extensive experience of over 30 years, including a substantial tenure at a reputable U.S. bank exceeding 20 years. 

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