Wall Street Update
NEW YORK: Wall Street's rally came to an abrupt halt over the past week, with stocks turning sharply lower on mounting concerns that inflation is making a comeback.
The Dow Jones Industrial Average, which came within 100 points of its all-time high at midweek, slumped 1.7% in the week to Friday to end at 11,380.99.
The tech-heavy Nasdaq meanwhile plunged 4.2% for the week to 2,243.78, while the broad-market Standard and Poor's 500 index gave back 2.6% to 1,291.24.
The turning point for Wall Street came on Wednesday after the Federal Reserve disappointed many investors by failing to signal it was ready to pause or halt its cycle of rate increases.
The central bank announced its 16th consecutive rate hike, lifting the base rate to 5.0%, while leaving the door open to additional increases.
Against a background of near-record prices for many commodities including crude oil, this heightened jitters about inflation.
Lynn Reaser, Bank of America economist, said the nervousness may persist.
“These concerns about higher inflation threaten equities in two ways. First, they could prompt the Federal Reserve to continue raising interest rates, ultimately jeopardising the economic expansion. Second, they could put further pressure on long-term interest rates, raising discount rates on stock valuations,” Reaser said.
“Next week's reports on underlying inflation will test investors' mettle. Some of the markets recent sell-off probably represents profit taking, but investors now need confirmation that productivity gains and global competition are keeping a lid on inflation.”
“Financial markets are exceptionally volatile across the entire spectrum of instruments,” said Andrew Busch, an analyst at BMO Nesbitt Burns.
“Good for trading, bad for economies. Dangerous for finance officials. Rumours of a hedge fund blow-up in commodities could be (the) start of bigger problems.”
Lehman Brothers economist Ethan Harris said he expects volatility in the markets as each bit of economic data is released, since the Fed and new chairman Ben Bernanke have pledged to be “data dependent” in deciding on monetary policy.
“The markets continue to hang on every word from the Fed. The latest directive confirms that policy is data-dependent, with a particular focus on inflation risks,” he said.
“The Fed is grappling with two risks: that it has already tightened too much and that a sharp economic slowdown is in the works (or) that it has tightened too little and an acceleration of inflation is on the way.”
Bob Dickey, technical analyst at RBC Dain Rauscher, said he is not overly concerned about what appears to be “a normal correction period” after a series of rallies in recent weeks.
“The advance was fairly orderly, and we believe that a pullback will also be modest by historical standards. The support on the Dow is very good around 11,000, and we expect the index to test that support over the next two months, which is about a five percent risk from current levels ... We are not looking for any kind of substantially serious decline, but do think that it will be tradable for the more aggressive investor.”
Bonds were pressured by concerns about inflation and the Federal Reserve's next moves on interest rates.
The yields on the 10-year US Treasury bond increased to 5.186% from 5.108% a week earlier while the 30-year bond yielded 5.298% compared with 5.195%. Bond yields and prices move in opposite directions. – AFP