begun to resemble a roller coaster, with more dips than rises, resulting in a
decline of about 3.8%. As for small caps, the Russell 2000 index, which helps
gauge overall risk aversion in the market, fell 6.8%. Finally, the Nasdaq index
posted a 4.7% decline.
In contrast, the DXY rose
2.6%, and U.S. 10-year Treasury yields surged an impressive
9.8%. Yields on the 20- and 30-year Treasuries jumped 8.5% and 8.4%,
respectively. Overall, investors seem to have become more cautious and have
been flocking to safer assets in recent weeks.
What has caused this change in mood?
The volatility spike occurred on December 18, the day of
the Federal Reserve meeting. In addition to the expected 25 basis point rate
cut, the Fed “surprised” markets by revising
the rate cuts scheduled for 2025, reducing it from four to two, citing
slower progress in disinflation.
Then, the negative factors kept coming: Trump threatening
more tariffs against the rest of the world, the Biden administration imposing tougher
sanctions on the Russian energy sector, and
stronger-than-expected US economic and labor market data.
All of this raised concerns that prices in the U.S. could
start rising again, which could mean the Fed won’t cut rates this year and
might even have to raise them to prevent inflation from accelerating. This
fueled more market anxiety and a cautious retreat from riskier assets.
But could these be just temporary moves?
Despite a choppy start to the year, analysts at major banks
continue to forecast that the S&P 500 will break above 6,600 points by the
end of December. However, relying solely on this as a guaranteed sign that the
bull market will continue does not seem promising.
Much will depend on how world events unfold. For example,
if new sanctions on Russia result in a loss of some 800,000 barrels of oil per
day, oil prices will likely rise initially, which could drive up the cost of
goods and services, as oil is a key commodity in almost every aspect of our
lives.
Another factor to consider is geopolitical risks. Although
Trump promised to resolve all crises almost immediately after his inauguration,
the reality may be much darker: existing conflicts could be exacerbated, and
new ones could emerge, such as between Iran and Israel or Armenia and
Azerbaijan.
This article was written by FL Contributors at www.forexlive.com.