Market Overview

Strong quarterly earnings and forward guidance for the rest of the year from TJX off-price retailer of apparel and Walmart chain of discount stores turned Wall Street indexes slightly up in the second half of the week, which was generally full of moaning in news. Chinese recovery doubts, including rather weak retail sales and industrial production as well as tensions with real estate debts, increased crowd's fears of vulnerability while the expert community focused on U.S. Treasury yields soaring to their highest levels since mid-October. It would be worth mentioning here that it was exactly the moment when the S&P 500 broad market indicator dipped to the area below 3,500 on recession fears. 

A desire of excessively large reward by potential debt buyers usually alerts the financial system. Therefore, it looks natural that all the three major stock indexes in the U.S. continue to slide, this time stimulated by easing bets of less hawkish Fed policy and rumours on a possible downgrade of largest U.S. banks by Fitch rating agency. This does not sound like a piece of science fiction anymore, after the same agency recently shocked global investors with a surprising downgrade of the U.S. sovereign credit debt rating from AAA to AA+. Meanwhile, Moody's already decided to cut the ratings of ten mid-sized and regional U.S. banks. A spectre of banking crisis is haunting markets once again after March stories with Credit Suisse and Silicon Valley Bank.

The Federal Reserve (Fed) released the minutes from the July 25-26 Federal Open Market Committee (FOMC) meeting. In this document, the Fed refrained from using uncertain terms when admitting "significant" upside risks to inflation, which "could require further tightening of monetary policy”. Although "some" governors were hesitant to speak out in favour of additional rate hikes, citing concerns that excessive tightening in 2022-2023 may "prove" to be "more substantial than anticipated", the minutes altogether offered a confirmation that the Fed's hawkish appetite is not fully satisfied. If the regulator is ready to take more steps along the road of rate hiking, it may slow both the U.S. and global economy, by limiting business marginality and wages.

The Fed is not looking too nervous about upsetting financial markets, which could be another big mistake after neglecting inflation spikes after the pandemic. "Since the emergence of stress in the banking sector in mid-March, indicators of spending and real activity had come in stronger than anticipated; as a result, the staff no longer judged that the economy would enter a mild recession toward the end of the year," the minutes said. A downturn in stock market trends might bring bond yields lower, and this may be the only positive outcome of such a policy, at least from the Treasury's point of view, but this kind of changing the investing minds' way of thinking is unlikely to reassure market bulls. Yet, those who have sown the winds may ultimately reap a whirlwind.

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