U.S. stocks closed lower Friday, 17th December 2022, with trading especially volatile due to $2.6T worth of options expiring as part of triple witching day.
The weakness was mainly due to the BOE, ECB, and Fed all raising interest rates by 50 bps followed by hawkish statements. The catalyst was not so much the statement from Jerome Powell.
The market actually took a nasty turn downwards after the Q&A session with ECB President Christine Lagarde. Using words like “this is not a pivot” and “more 50bps hikes to follow” she set the record straight that they mean business and the market’s optimism is misplaced.
Taken together with Jerome Powell’s earlier statements, the market may now be shifting to believe that a pivot is not expected to come in 2023 and a possibility of a recession looms closer.
US Treasuries were mixed, with short-term bonds rallying on Friday. The policy-sensitive two-year yield ended the week nearly 19 basis points lower than where it started. The dollar was little changed for the week.
For the week, the S&P fell 2.1% making it 3 losses in 5 weeks. The Dow dropped 1.7% and the Nasdaq shed 2.7%
Here are the closing levels on Friday, 17th December 2022:
| Last | Change | %Change | |
| Dow Jones | 32,920.46. | -281.76. | -0.85% |
| S&P 500 | 3,852.36 | -43.39 | -1.11% |
| Nasdaq Comp | 10,705.41. | -105.12 | -0.97% |
| US 10Y | 3.48% | ||
| VIX | 22.62 | -0.21 | -0.92% |
Over the week, it was announced that Goldman Sachs will cut as many as 4000 jobs, following Morgan Stanley’s earlier announcement of cutting 2000 jobs.
Meta platforms also announce huge layoffs. Oddly enough, Meta stock rallied on the news while Goldman’s stock price fell heavily.
Putting the sad news of people losing their jobs aside, it shows how the market reacts to the news differently or unexpectedly.
This brings up the point of how markets have been reacting to the central banks, specifically the Fed’s warnings on higher for longer.
We have seen markets rally on a few occasions ignoring the Fed’s comments or reading the wrong message. A case in point is that when it was announced that the hikes would be smaller i.e., 50bps instead of 75bps, the market took it to mean a pivot was coming and rallied on the back of that.
The selective reading into announcements, and the over-optimism, may have come to rest after this week’s statements. Credit must be given to Christine Lagarde. Her press conference was more forceful than Powell’s in getting the message through that there is more to be done in the fight against inflation. That they are not pivoting.
To be fair, Powell’s message was similar but Lagarde was more convincing and the markets may have finally got the message. At least that’s the reading from last week’s price action.
It would not be surprising to see buying on dips as there are still investors who believe that the economy is strong enough (soft landing) to withstand higher rates or that a recession (hard landing) may force a pivot or that the market is oversold. Follow these investors at your own risk. From the last week’s central bank moves and comments, a new low looks more likely than a Santa Clause rally.
Speaking of Christmas, I will not be writing a commentary next week as I will be celebrating with my family and friends.
May God bless you all this Christmas!
Source: CBOE, Bloomberg
This commentary is written by James Gomes
James has been in the finance industry for over 30 years and most recently worked for a large U.S. bank for more than 20 years.
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