The stock market in the United States experienced its largest weekly drop in eight weeks, as investors considered a range of corporate earnings reports and pondered the likelihood of increased interest rates following the release of crucial inflation statistics in the coming days.
The S&P 500 index saw a slight increase of 0.2%, but still faced a decline of 1.1% for the week. Meanwhile, the tech-focused Nasdaq Composite faced a drop of 0.6% on the same day, resulting in a 2.4% loss over the course of five trading sessions.
These movements marked the largest weekly losses for both indices since December, with the Nasdaq’s weekly decrease marking its first in 2023.
Possible Reasons behind the Market Downturn
Jack Ablin, the visionary behind Cresset Capital, has highlighted the root cause of the recent market downturn as a result of an inconsistent set of quarterly earnings and mounting worries over the Federal Reserve’s determined stance to persist with raising interest rates.
In his interview with the Financial Times, Ablin emphasized that the market has been grappling with two main challenges.
Firstly, it is anxious that the Federal Reserve is tightening its grip too much and awaiting a steep drop in inflation. Secondly, the earning outlook’s weakening is also a reason behind the anxiety.
While some blue-chip companies like PepsiCo and Disney exceeded expectations and impressed analysts with their performance, other prominent players in the consumer economy, such as Lyft, Chipotle, and Mattel, fell short with their results.
Meanwhile, US Treasury yields continued to escalate, with the inversion between the yields of two-year and ten-year notes reaching its lowest point since 1981.
The yield on the ten-year note increased by 0.06 percentage points to reach 3.75%, and the rate-sensitive two-year yield saw a slight rise to 4.52%.
The Current Situation of the US Dollar and Japanese Yen
The Dollar index, which analyzes the US dollar’s strength against numerous major currencies, saw a 0.3% increase. On Friday, the yen strengthened as the market responded positively to the expected appointment of Kazuo Ueda, an academic, as the next governor of the Bank of Japan.
The Japanese yen saw a modest 0.1% increase to ¥131.45 against the US dollar as investors react to the probable appointment of Kazuo. This is seen as a departure from the current governor Haruhiko Kuroda’s ultra-dovish monetary policies, who is set to retire in April.
Analysts from MUFG noted in a research note that the initial reaction to Ueda’s appointment was the strengthening of the yen, which they attribute to a combination of uncertainty over Ueda’s monetary policy views.
Why the Japanese Yen Is Rebounding
The rebound of the Japanese yen from its three-decade low is due to the relaxation of the Bank of Japan’s monetary policy by Governor Haruhiko Kuroda, who is set to step down in April.
The yen hit its low point in October due to the growing difference between Japan’s loose monetary policy and rising interest rates in other parts of the world.
The recent announcement of Kazuo Ueda as the likely successor to the Bank of Japan governorship has led to a combination of uncertainty over Ueda’s monetary policy views and the departure of continuity candidate Masayoshi Amamiya.
A Closely Interlinked Global Market
In the energy market, Brent crude saw a 2.2% rise to settle at $86.39 a barrel. The rise was triggered by Russia’s announcement of a 5% cut in its monthly oil output in response to a price cap imposed by western nations.
In light of Russia’s announcement of cutting 5% of its monthly oil output, UK energy stocks saw a significant boost and reached their highest level in over three years.
The news was well received by the market as shares of US energy giants ConocoPhillips and ExxonMobil rose by over 4% on Friday. The oil and energy industry seems to be reaping the benefits of the output cuts imposed by the western nations and their efforts to regulate the market.