Investors were once again bowled over by a sudden drop in cryptocurrencies, along with hints that the Federal Reserve is now poised to pull out of bond buying activity.
MANHATTAN (CN) – Unable to take a break, Wall Street posted another losing week, this time prompted by panic among cryptocurrency traders.
The Dow Jones Industrial Average gained a bit on Friday but fell 174 points for the week, while the S&P 500 lost 17 points and the Nasdaq actually managed to gain 41 points for the week.
What started as a precipitous plunge for Bitcoin earlier this month deepened on Tuesday amid statements from the Chinese central bank that cryptocurrencies could not be used or accepted as a form of payment.
Cryptocurrencies were able to recoup some of those losses on Wednesday and Thursday, but the markets were marked by the steep decline. “Cryptocurrencies have always been very volatile,” wrote market analyst Milan Cutkovic at AXI Trader, “but investors will likely need time to recover from this week’s dramatic price action.”
China once again put cryptocurrency in the crosshairs on Friday, with the regime’s State Council’s Financial Stability and Development Committee pledging to crack down on bitcoin mining and trading.
This followed a promise from the Biden administration on Thursday to begin tax crypto transfers with a fair market value of at least $ 10,000, treating virtual currency the same as cash transactions. The tax report notes that “cryptocurrency already poses a significant detection problem by facilitating illegal activities at large, including tax evasion.” He also cited reports suggesting that cryptocurrencies are being used as “super tax havens” despite their relatively minor use as business income.
By the closing bell on Friday, bitcoin had fallen by around $ 6,000 for the week, while Ethereum – which took a hard hit earlier in the week to stabilize somewhat on Friday – fell more than $ 900. since Monday.
Other factors scared investors this week, including a sudden shift by the Federal Reserve regarding its approach to quantitative easing. Investors tend to view quantitative easing, or the process of removing the Fed from the markets, as having a negative effect in the short term. Some, however, believe it is necessary to preserve the economy as inflation emerges.
In typical Fed talk, minutes from the central bank’s Federal Open Market Committee reveal that “a number of participants suggested that if the economy continues to move rapidly towards the committee’s goals, it may be appropriate at some point in upcoming meetings to start discussing a plan to adjust the pace of asset purchases. “
The revelation that the Fed was “essentially thinking of” a phase-out and considering changes to its massive bond-buying program gave investors a boost.
The Presidents of the Federal Reserve Banks of Philadelphia and Dallas have publicly declared their support for the phase-out. Friday, Patrick Harker mentionned, “We should start having a conversation about it as soon as possible,” adding that it might be good to reduce bond purchases “carefully, methodically, I would even say boringly, so as not to surprise the market.”
Some warn, however, that the Fed will still take its time, especially with Jerome Powell at the cash register. Tom Essaye of the Sevens Report noted that “no one should expect a degressive discussion at any time before the [Fed’s] June meeting ”As one might suppose, a minority at the central bank is pushing for cuts.
“Bottom line, the FOMC minutes provided a mild hawkish surprise on Tuesday, and as the stock’s knee-jerk reaction was waning,” Essaye wrote. “In this case, the Fed acknowledging at least that the cut will be necessary at some point gave some comfort to the markets, the Fed did not go dovishly mad.”
Essaye noted, however, that “the stakes are high because if the Fed messes it up, we should all be bracing for a tough stock and bond market for the second half of 2021 and (at least) early 2022.
Despite recent tough times on Wall Street, analysts and economists remain bullish on the US economy. According to The data from the Atlanta Federal Reserve, gross domestic product is expected to grow by more than 10% in the second quarter of this year, down from 13.7% earlier this month after the release of the ISM manufacturing index.
DataTrek Research analysts attribute this to the dismal April jobs report, which had already sparked markets, although further declines occurred in response to inflation indices in last week’s publications of the producer and consumer price indices.
Another positive indicator is the slight drop in new jobless claims. For the week ending May 15 only 444,000 initial requests were filed, against 478,000 complaints the previous week. This is the third week in a row that new claims are less than 500,000, ahead of reviews.
But even this data point hides a worse reality. James Knightley, chief international economist at ING, wrote that, despite the drop in jobless claims, “we cannot shy away from the fact that virtually all business surveys suggest that companies want to hire, but are struggling. to do it.
Knightley predicts that there will be three or four months of labor issues, while competition for workers remains strong. “A good indicator to watch here is the ‘dropout rate’,” he wrote, referring to the number of workers leaving their current job to join another company. “We expect it to set a new all-time high from the current 2.4% figure, which is currently its all-time high.”