Written by Risk markets wounded
Despite the much-awaited end of the US federal government shutdown and the current US-China trade truce, Thursday proved to be an extremely bad day for risk assets. Equities and cryptocurrencies suffered the most, with gold overcoming its initial weakness and catching a bid after bouncing off $4,160.
Major US indices declined yesterday, with the Nasdaq 100 index taking the biggest hit. It was the weakest daily stock performance since October 10, when the Nasdaq suffered a 3.5% drop, only to bounce higher by 2.2% the following day. Drilling down into S&P 500 sectors, consumer discretionary shares led the sell-off ahead of the technology sector on Thursday. With US consumer sentiment weakening, this decline could be seen as a strong indication of a weaker US economic outlook.
Similarly, cryptos remained under severe pressure, with Ether dropping around 7% on Thursday. The biggest altcoin is attempting to recover today, but with Bitcoin dropping aggressively below the $100k threshold, the outlook remains deeply bearish. The king of cryptos closed below this key level for the first time since mid-June.
This is actually the third consecutive negative week for cryptos, the first such instance since late-August, but the current pace of decline is much greater. Notably, a fourth consecutive red week is rather uncommon, with the last such sequence dating back to July 2024.
Despite this risk-off reaction, gold was also under pressure yesterday, interrupting its streak of green candles. It is trying to recover today, but one could have expected a better performance from the precious metal considering the equities reaction and the continued dollar weakness against the euro. That said, moves in the FX space have been small-scale, with risk-on currencies like the kiwi outperforming the dollar.
Likely factors behind this correction
A few factors have been touted for Thursday’s correction, but nothing quite fits the bill. With the market being split about the possibility of a December Fed rate cut, some analysts point to remarks from regional Fed Presidents Hammack and Kashkari to justify the stock market correction. However, both are on the hawkish side – with Hammack seen as the leading hawk of the pack – and hence investors should not be surprised by their commentary.
Quite noticeably, the doves remain on the sidelines, with Kansas City Fed’s Schmid – who voted for a pause at the late-October meeting – Dallas Fed’s Logan and Atlanta’s Bostic scheduled to speak later today, with a solid chance of further hawkish remarks that could further dent risk appetite.
There are also lingering concerns about the delayed US data showing a significant economic impact from the government shutdown, but this should have already been priced in. Investors understand that Q4 numbers will not be representative of the underlying economy, potentially stopping the Fed from cutting again until ‘clean’ data is once again available.
Meanwhile, tech stocks have been under pressure since early November, as, despite the US-China trade truce, the AI race continues. The Gain AI Act, currently being discussed in the Senate and aiming to restrict the exports of advanced artificial intelligence chips to China, has gained the support of both Amazon and Microsoft, creating a rift between the leading tech stocks, but also raising the possibility of renewed trade tensions with China.
Notably, China is ramping up its domestic chip production, with both Huawei and Alibaba trying to benefit from Nvidia’s inability to offer unrestricted AI chips, creating another headache for US-based chip manufacturers. The big test for the market will be next week’s Nvidia earnings release.
Yen sell-off pauses; pound weakness persists
While the dollar/yen rally has paused, mostly due to the dollar losing its recent shine, the pound remains under pressure. Following articles that the left-wing section of the Labour party is thinking about toppling Starmer and replacing him with a more left-leaning candidate, the Prime Minister has decided to drop the personal tax cut plans for the November 26 budget.
With a £30bn fiscal hole needed to be addressed, other taxes such as property levies, could feature in the budget, appeasing left-leaning Labour MPs. This U-turn was not well received by investors, with euro/pound climbing to 0.8864, the highest level since late-April 2023, also hit by the inflated probability of a December BoE rate cut.
By XM.com
