Weekend Review

Stocks slumped Friday to cap their worst week of the year.

The S&P 500 fell 1.1 percent by the end of the trading day, adding to losses earlier in the week and recording its third straight week of declines.

That came in a shortened week, with markets closed on Monday for the Presidents’ Day holiday. Tuesday’s trading notched the worst single day for the S&P 500 since mid-December, helping to push the index to its worst weekly performance of the year: a decline of 2.7 percent.

Wall Street’s reaction to hotter-than-estimated inflation data suggested growing bets the Federal Reserve has a long way to go in its aggressive tightening crusade, making the odds of a soft landing look slimmer.

A slide in the S&P 500 Friday extended its weekly rout. The tech-heavy Nasdaq 100 sank almost 2% as the Treasury two-year yield hit 4.8%, the highest since 2007. The dollar climbed.

Swaps are now pricing in 25 basis-point hikes at the Fed’s next three meetings, and bets on the peak rate rose to about 5.4% by July. The benchmark sits in a 4.5%-4.75% range.

After a lengthy period of subdued equity swings, volatility gained ground this week too. Aside from all the economic uncertainties, that’s reflective of a market that has become more expensive after an exuberant rally from its October lows.

Those gains have been dwindling by the day amid fears that a potential recession could further hamper the outlook for Corporate America.

“There’s little room for upside in stocks right now given the inflation news, current market valuations after the January rally, and a weak Q4 earnings season,” said Brian Overby, senior markets strategist at Ally.

The unexpected acceleration in the personal consumption expenditures gauge underscored the risks of persistently high inflation. Furthermore, resilient spending paired with the exceptional strength of the labour market could make it tougher for the Fed to get inflation to its 2% goal. Separate data showed US consumer sentiment rose to the highest in a year while new home sales topped forecasts.

Still, with the economy proving more durable in the face of higher interest rates than many had expected, some investors are becoming more hopeful that the Fed could be able to tame inflation without inflicting too much economic pain.

“It’s not quite Goldilocks, but if we get an environment where growth holds up, which it is so far, inflation continues to come down and the Fed can ease up with interest rates, that is a pretty good environment,” said Brian O’Reilly, head of market strategy at Mediolanum International Funds.

On our side of the Atlantic, Britain’s economic prospects have improved enough to hand Chancellor of the Exchequer Jeremy Hunt an extra £10 billion at next month’s budget, removing the threat of a further round of austerity, experts say.

Earlier this year, the Office for Budget Responsibility warned Hunt that it had overestimated medium-term growth and he faced the prospect of more belt-tightening to fill a multi billion-pound fiscal hole.

Since then, economic growth has improved, businesses have stepped up investment, energy prices have fallen and tax receipts have been healthier than expected. That combination of factors is likely to have more than offset the impact of the OBR’s downward revisions.

“Some things have changed,” said Sanjay Raja, chief UK economist at Deutsche Bank. “Net-net we are in a much better position than we previously thought. This should spell some good news for Chancellor Hunt.”

Tax receipts have also proved resilient over the first 10 months of the year, with valued-added tax, income tax and capital-gains tax all generating more revenue than expected.

The outlook for growth this year is also better than the 1.4% contraction the OBR projected in November. The Bank of England earlier this month forecast a 0.5% fall. Since then, the data has proved stronger than the BOE thought.

Market interest rates have also dropped since November, saving roughly £10 billion a year in the longer-term.

So, overall, it’s not really as doom and gloom as the markets might have suggested this week. Sticky inflation was always a possibility; but it will fall. The PCE data was a setback, and that can happen, but we’re still only in February, and there is a lot of 2023 left for inflation to fall, interest rates to pause, and the market to find some good news to rally.

Most of the active traders on TPP have been short in recent weeks so this move downward was needed after the rally had proven resilient. Some of these short positions have now been liquidated although there is still an overall short bias.

Most of the long or flat strategies are now starting to buy into the market again after selling out at recent highs. In the short term, we expect more ups and downs as always, but over the mid-term, there could be a good rally heading our way a little later in the year.

For traders it’s important not to listen to all the noise and focus on the data. The market rarely does what you’d expect from one day to the next, but thinking longer term makes decisions much easier. Common sense also tends to prevail, and inflation simply cannot maintain its current elevated levels. It’s not a question of ‘if’ but ‘when’.

All of our traders will be confident of generating a positive return in Q1 regardless of whether markets go up or down.

After averaging 40% per annum over the last 3 years since formation, the pressure is on and expectations are high.

In 2023- A rising market, or one that trades in ranges would both be very good climates for our traders. Although most investments stagnate in ranging markets, on our platform our traders have a habit of buying at short term lows, and taking profit at short term highs. Therefore, whether the market stagnates within a tight range, or rises moving forward- we hope our traders and trading teams take advantage for our clientele.


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