10th December 2022 – 16th December 2022 | Another week in the markets
| S&P 500 | Nasdaq | VIX | DJIA | Russell 1000 | NYSE |
| 3,852.36 | 10,705.41 | 22.62 | 32,920.46 | 2,113.19 | 15,018.17 |
| -2.08% | -2.72% | -0.92% | -1.66% | -2.04% | -1.78% |
| Nifty 50 | Gold | Silver | Brent crude | USD-INR | EUR-INR |
| 18,269.00 | $1,803.00 | $23.41 | $79.26 | 82.68 | 87.54 |
| -1.23% | -0.35% | -1.14% | 3.18% | 0.29% | 0.80% |
Source: MarketWatch
Hello Saturday,
This week central banks around the world increase interest rates, the Fed remains hawkish on 2023’s outlook, and a global recession threat increases.
- Despite November’s inflation data being lower than expected, the Fed continues to be hawkish, hiking rates by 50 basis points as anticipated by investors, and promising more of the same in 2023
- Central banks across the world, including that of Britain, Norway, Switzerland, the Eurozone, and the Gulf countries, raise interest rates after Fed guidance, increasing the risk of a global recession
- The US Securities and Exchange Commission (SEC) to revamp American stock market rules for greater transparency and price competition to benefit retail investors
- Tesla’s stock drops sharply this week, about 15%, as Musk sells his stock for the fourth time this year as investors show frustration with the shift in the CEO’s focus and resources to Twitter
- Chinese companies like Alibaba and Baidu listed on the US stock exchanges dodge the threat of being delisted as US officials announce receiving the required access to audit documents
Taking stock | Fed-up | Double-edged sword | SEC’s change | What’s up, Elon? | Hidden Dragon sneak-peek | Invest wisely
Taking stock
In the wake of the Fed’s December policy meeting, US stocks ended the week in the red, with major indices notching a second consecutive week of losses. The Dow slid 1.66%, S&P declined 2.08%, and Nasdaq slipped 2.72%. With this, the hopes for a year-end Santa Claus rally fizzled. Trading was volatile on Friday, with index options worth $2.6 trillion expiring – the highest amount in two years.
Fed-up
This Wednesday, the Federal Reserve, in a move highly anticipated by the financial markets, hiked interest rates by 50 basis points, lifting the federal funds rate to the 4.25%-4.50% range. While this finally ended the four consecutive 75-basis-points hikes, Fed Chair Jerome Powell warned that the recent slowing of inflation numbers is not enough for the Fed to put an end to this fastest rate-hiking cycle that the US has seen since the 1980s. 2023 would continue to see rate hikes lifting the targeted policy rate to a level between 5% and 5.25%.
As measured by the Consumer Price Index (CPI), annual inflation in November was 7.1%, down from 7.7% in October. This number came in lower than expected and is the second consecutive month of moderating price pressures. While this is good news for consumers and investors, policymakers still have a long way to go to achieve the target inflation level of 2%.
Source: Reuters
Double-edged sword
Central banks around the world, including that of Britain, Norway, Switzerland, and the Eurozone, raised interest rates after Fed guidance this week. This list also includes the Gulf central banks of Saudi Arabia, Bahrain, and Qatar, which raised their interest rates by 50 basis points. Such a move only increases the risks of a global recession. That’s because using interest rates to combat high inflation levels is a double-edged sword. While it is an effective way of bringing down inflation, it also negatively impacts economic growth and employment levels. Analysts, however, predict that a recession in the first half of 2023 in economies like the US will be a mild one and that the second half of the year will prove to be more stable and prosperous for the markets once things settle down.
SEC’s change
This week the US Securities and Exchange Commission (SEC) voted to propose significant changes to the equity market structure, something that has not happened in nearly two decades. The proposals aim to benefit retail investors through greater transparency and increasing competition for investors’ stock orders. The two significant reforms include sending marketable retail stock orders to auctions before they are executed and a new standard for brokers to show that they get the best possible executions for client orders. Okay, but what does this mean?
Stock exchanges like NYSE or Nasdaq serve as marketplaces where buyers and sellers haggle over the price of a company’s shares, allowing the free market forces of demand and supply to decide the price. Typically, if a retail investor in the American stock market decides to sell, say 100 shares of company X, and clicks on the sell button on his stockbroker app, this order often doesn’t go to the stock exchanges. Instead, the retail investor’s order will be sent by the stockbroker to a wholesale broker, like a hedge fund, for a fee. Because the retail investor’s order never reached the open marketplace, there is no way to know whether they got the best possible price for their order. Hence, if the SEC proposed changes are adopted, it would help the price discovery process and save retail investors money.
What’s up, Elon?
Among other things, keeping Elon Musk out of this newsletter has been difficult this year. The Tesla CEO unloaded about 22 million shares of Tesla, amounting to about $3.6 billion this week. This is the fourth time Musk sold Tesla stock this year, with his total nearing $40 billion. Predictably, investors are furious as the company’s shares are at two-year lows, falling almost 50% over the last three months and 28% since Musk bought Twitter. Tesla stock is getting hammered to such an extent that after a sharp drop this week, Musk is no longer the richest person in the world.
While it’s unclear if this sale has anything to do with Twitter, Tesla investors are upset as they feel Musk’s resources and focus have shifted from the automotive company to the social media platform. Since disclosing his 9% stake in Twitter in April, Tesla’s market capitalisation has plunged from $1.2 trillion to $495 billion.
Hidden Dragon sneak-peek
After a decades-long standoff between Washington and Beijing, US officials announced this Thursday that they have gained sufficient access to audit documents required on companies in both China and Hong Kong. For years Beijing had been against foreign inspection of audit documents of Chinese companies for national security reasons. Because of this, earlier this year, more than 200 Chinese companies, including Alibaba, JD.com, and Baidu, listed on US stock exchanges faced a serious threat of delisting over the audit dispute. Chinese stocks in the US rose as a response to dodging the delisting threat, and the Golden Dragon Index jumped 2.5% just after the open on Thursday.
Invest wisely
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Warm regards,
Another week
in the markets
