Futures in the United States and Europe are flat today following the massive beating that technology stocks took in yesterday’s session. Investor sentiment regarding technology stocks was negative because of inflation continuing on its rising trend and Fed officials’ restating that interest rates will likely be raised as soon as March.
Today, we are awaiting a slew of economic data, including retail sales numbers for December. It is expected that retail sales will have fallen 0.1% in the given period. Similarly, we are also expecting industrial production data to be released today, which is likely to have climbed 0.2% in December.
In addition to the economic numbers, earnings of banks such as Wells Fargo, JPMorgan, and Citigroup are also set to be released before today’s opening bell.
In Thursday’s session, the Dow Jones Industrial Average fell 0.49%, while the S&P 500 index slumped 1.42%. The Nasdaq, the tech-savvy index, dropped 2.51% while the Russell 2000 dipped 0.76%.
Investors should note that, although stock markets in general were under pressure in yesterday’s session, the Nasdaq was the relative underperformer, shedding nearly 381 points. The cause behind yesterday’s selloff was the inflation reading, which continued on its upward trajectory, strengthening the Fed’s stance on raising interest rates sooner. As per latest numbers published by the Labor Department, the producer price index jumped 0.2% in December on a month-over-month basis. The expected rise was 0.4%. Similarly, consumer prices hopped a whopping 7% in December on a year over year basis, which is the steepest climb in inflation since 1982.
Investors should understand that higher inflation numbers would likely prompt the Fed to raise interest rates sooner, which does not fare well for technology companies whose valuations are based on high growth rates. When interest rates rise, the present value of future cash flows decline, dragging down valuations of technology companies and their respective stock prices. This is exactly what we are witnessing, as investors are rebalancing their portfolios to incorporate changing dynamics. As a result, the share price of Microsoft fell nearly 4% while that of Nvidia slumped 5% in yesterday’s session. Similarly, other technology behemoths such as Meta, Alphabet, and Apple also closed yesterday’s session in the red.
Risky assets have generally been bleeding in recent weeks as a result of rising treasury yields and expectations that interest rates will likely be raised beginning in March. This is because, over the last two years, investors have had the benefit of an ultra-easy monetary policy, as a result of which the cost of capital has been reduced and liquidity was being pumped into the American economy in the form of bond purchases by the Federal Reserve. Because of these circumstances, investors were able to take positions in risky assets such as cryptocurrencies, allowing them to soar to unprecedented heights. However, as the Fed becomes more hawkish and liquidity is withdrawn from markets, investors are becoming more and more risk averse, causing Bitcoin prices to fall to around $42,000.
Having said that, bitcoin’s price could likely reach $75,000 in 2022. This is because the future outlook of cryptocurrency adoption remains positive, supported by strong fundamentals and increased interest by institutional investors. Hence, investors should take this opportunity to invest in the digital coin sector while prices are still low.
Following a rapid rise in oil prices over the last few days, if not weeks, the upward pressure on oil prices has been somewhat alleviated by expectations that Washington will likely act to lower prices by releasing crude oil from its strategic petroleum reserves. Furthermore, demand for crude oil is expected to fall due to an increase in coronavirus cases in China, the world’s second largest oil consumer, which has forced Beijing to implement travel restrictions, including the suspension of international flights.
However, investors should keep in mind that the price of crude oil is expected to resume its upward movement because of concerns in Kazakhstan and Libya. Moreover, the dip in crude oil stockpiles to 2018 lows also paints a gloomy picture for oil consumers.
In anticipation of higher interest rates and reacting to higher treasury yields over the past few weeks, the price of the precious metal has been falling in recent days. This is because when interest rates surge, the opportunity cost of holding the yellow metal also rises, making it less appealing to investors. On the other hand, despite the recent decline in gold prices, the price of the precious metal is still above $1,800. This is because cases of the new variant are still on the rise and gold is used by investors as a safe haven in times of uncertainty.
Despite rising inflation and high anticipation of interest rate rises starting in March, the dollar index fell nearly 0.9% this week and is on track for its biggest dip since May 20, 2021. We think that the dollar index is falling because interest rate hikes are fully priced in by market participants. On the other hand, the Euro is up 0.8% for the week.
Asian Pacific Markets
As per data released today in China, exports, in terms of the U.S. dollar, of the second biggest economy in the world jumped 29.9%, while its imports surged 30.1%. The supply chain constraints faced by nations due to the ever-spreading Omicron variant may have shifted orders from other developing countries to China. Furthermore, the Bank of Korea also raised its policy rate to 1.25%.
As of 12.22 a.m. EST, the Nikkei slumped 1.31% and the Shanghai index dropped 0.53%. The Hang Seng index, in Hong Kong, dipped 0.91%. The ASX 200 index fell 1.04% and the Seoul Kospi declined 1.36%.