Market Insights: USDJPY, Meme Stocks, Dow Jones, VIX, and Fed Funds
This last session, the market shown more susceptibility to shifts in risk trends, with some turbulence seen in meme stocks and anxiety around Fed Chairman Jerome Powell’s Q&A. Despite this, benchmark risk assets were able to rebound, which led some people to think that this may be an indication of real optimism. It will be interesting to see if this momentum can be maintained, especially given the week’s remaining light economic calendar.
At the beginning of the week, many potential market disruptors were curbed, including the spike in Bed Bath & Beyond shares, which mirrored the market’s behavior in the first few months of 2021 when inexperienced traders crowded the market in quest of rapid gains. A 49% decline in stock price followed the company’s disclosure of a $1 billion share sale or bankruptcy risk, but other than GME and AMC, the Nasdaq 100 performed well as a result. Despite the market’s mismatch between retail exposure, short runs, and cheap premiums for risky assets, a rebalancing of the market isn’t a given. The S&P 500 and Nasdaq 100 are nearing their five-month highs, but the Dow’s future performance will be the main focus.
Risk markets must take into account the Fed’s interest rate projections and the ensuing increase in Treasury rates. Although the jobs and services sector figures from last Friday were strong, the market’s discount to the Fed’s stated interest rate goals had decreased by Monday’s closing. Powell’s comments are consistent with the Fed’s position, so there isn’t much room for conjecture about what will happen next. Although projections for a slight rate decrease in the second half of 2023 may have some impact, the Dollar may require a new fundamental source of growth.
The market is still significantly impacted by the ongoing argument over interest rate forecasts between bulls and bears. The VIX volatility index is currently slightly around 19, which is higher than prior lows but still very close to its lowest depressed levels in a year. This means that while volatility may not decrease significantly, the risk of a surprise market decline still exists. Given that Japanese monetary policy remains unquestioned in comparison to that of the Fed and the Dollar, USDJPY is the primary currency based on the dollar that is most vulnerable to an increase in risk aversion.
There aren’t many possible triggers for market-moving events on the approaching economic calendar. Powell’s comments might not provide a clear direction, and traditionally, market volatility has not been very high when regional presidents and board members disagree with the FOMC’s “house perspective.” The US President’s State of the Union speech may include issues like growth projections and the debt ceiling, although this is not normally a market-moving occasion. Although earnings season is still ongoing, it is doubtful that corporate reporting from organizations like CVS, Uber, Yum!, Walt Disney, and Robinhood would cause significant indexes or the whole market to change direction.