The lingering apprehension about interest rate hikes never entirely go away.
Recently the concerns of a rate hike have escalated, as indicated by the movements in financial markets.
Firstly, long-term bond yields have continued their upward trajectory. The yield on the US 10-year bond has climbed from 4.267% to 4.289%, while the 2-year Treasury yield has surged past 5%, reaching 5.022%. This reflects an expectation that interest rates will remain elevated for an extended period.
Thirdly, stocks have once again experienced a decline after a brief rebound last week. The declines were not substantial, with the S&P 500 falling by 0.7% and the Nasdaq Composite dropping by 1.1%.
It doesn’t help when oil prices have been trending up and both major oil exporting countries, Saudi Arabia and Russia, are cutting production.
Saudi Arabia initially implemented a reduction of 1 million barrels per day in July, and in a recent announcement, they have extended this cut until the end of the year.
Russia, on the other hand, has decreased its exports by 500,000 barrels per day in August and an additional 300,000 barrels per day in September. They have also indicated an intention to maintain this 300,000 barrels per day reduction in exports until December 2023.
Since the beginning of July, the WTI Crude Oil price has surged by 25%, and given the ongoing production cuts, there is a possibility that oil prices may continue to rise.
However, it’s worth noting that other commodity prices show a mixed pattern. For instance, sugar prices have risen by 42%, while natural gas prices have dropped by 69% compared to a year ago. Therefore, the direction of inflation remains uncertain, as there is no clear trend in commodity prices.
Large-cap stocks have faced declines, but smaller-cap stocks have exhibited greater resilience. For instance, the Russell 2000 index experienced a modest 0.3% drop, which was less than the 0.7% decline observed in the S&P 500. Notably, risk-on stocks continued to thrive, exemplified by the ARK Innovation ETF’s 0.4% gain.
The decline in large-cap stocks can be partly attributed to Apple, where its shares tanked 4%. This drop could be attributed to reports of the Chinese government prohibiting its officials from using foreign-branded phones in the workplace, perceived as a retaliatory measure in response to the West’s restrictions on Huawei devices. Additionally, Nvidia faced a 3% decline, further contributing to the subdued market sentiment.
On the flip side, some of the smaller and more volatile stocks, such as Weight Watchers and Elastic, posted gains of 14% and 6%, respectively. If the stock market is truly bearish, investors would adopt a risk-averse stance and steer clear of such stocks. However, the current scenario doesn’t conform to this pattern, as investors seem inclined to take on more risk rather than shying away from it.
Consequently, the overall picture appears rather perplexing. While certain segments of the market appear weak, others demonstrate strength. It doesn’t present a clear-cut bull or bear case. If you’re feeling apprehensive, the prudent approach may be to exercise patience and stand ready to take action when clearer signals emerge in either direction.
