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Why Did the S&P 500 and Dow Close in the Red Yesterday?

Plus500 | Thursday 29 June 2023

Wall Street’s trading on Wednesday, June 28th, can be characterised as a mixed bag. Investors, eager as always for signs of what’s to come from Federal Reserve Chairman Jerome Powell, digested his latest remarks, and chip industry leaders fell in share price.

An image of the Wall Street sign mixed with dropping candlestick charts

More Rate Hikes to Come? 

The Federal Open Market Committee (FOMC), which determines the course of monetary policy for the United States, has been on a tear of interest rate hikes in recent times. As the post-COVID recovery heated up, the world’s largest economy saw inflation rates unexperienced by the average citizen in more than a generation. To fight inflation, the American central bank’s captains saw fit to raise the federal funds rate from 0.25% to 5.25% over the past fifteen months.

The Fed’s interest rate hikes have been accompanied by concerns that overzealous monetary tightening could weigh on the American economy and even push it into recession. Accordingly, the decision taken at the Federal Open Market Committee’s most recent summit, on June 14th, to keep interest rates unchanged may have come as a relief to traders and investors alike.

However, as has become clear, the markets are not out of the woods yet when it comes to interest rates. On June 28th, at a forum in Portugal sponsored by the European Central Bank (ECB), Fed Chair Jerome Powell clarified that multiple rate hikes were to be expected before the end of the year. Furthermore, these changes to the federal funds rate could even come at consecutive meetings, completing the 0.5%, or 50 basis point, hike hinted at by Federal Open Market Committee members at their most recent meeting. (Source:CNBC)

These most recent comments of Powell’s shed light on the sentiment held by the United States’ most senior monetary policy makers that the measures taken up to this point have not yet brought inflation down enough. While a broad-based economic recession, according to Powell, is possible, consumer price increases have still proven stickier than expected.

Major Indices Take a Hit

With the probability of further interest rate hikes growing more concrete, traders on Wall Street responded with a negative market mood yesterday. Over the course of the trading day, the S&P 500 (US 500) fell 0.04%, while the Dow Jones Industrial Index (USA 30) had dropped by more than 0.2% by the ring of the closing bell Wednesday. 

While these major American Indices ended Wednesday’s trading session in the red, according to some analysts, the general trade sentiment remains upbeat, at least for the moment. While inflation remains high, necessitating the aforementioned rate hikes from the United States’ central bank, indications that a recession is on the horizon are missing. The American labour market remains strong according to the latest data, and the Fed’s next monetary policy decision will probably not have overly adverse effects.

Chips Lose Their Shine?

Pessimism with regard to Wall Street as a whole may be currently uncalled for, but possible legal changes cast a long shadow over chipmakers’ trading yesterday. On the back of reports that stringent export bans to China could be instituted by the American Commerce Department, NVIDIA (NVIDIA) and AMD closed down by over 1.8% and 0.2% respectively on Wednesday.

The United States’ top policy makers are apparently concerned regarding the implications of China getting a hold of military-grade AI technology produced by American companies. Restrictions on specific semiconductors being sold to Chinese clients were announced in 2022, but according to recent reports, the Commerce Department may see fit to further limit chip deliveries to the world’s second-largest economy. 

Concerns that U.S. technology could be used by the country’s geopolitical rival may have some basis, but these restrictions are likely to have a negative impact on the bottom lines of the country’s biggest chipmakers. 

Amid artificial intelligence hype, industry leaders NVIDIA and AMD (AMD) shares rose in value by 181% and nearly 70% so far this year. However, yesterday’s trading session saw a reversal of this uptrend, with NVIDIA being the S&P 500’s biggest loser for the day. Business with China makes up more than a quarter of both firms’ revenue, leaving their near-term growth prospects shrouded in uncertainty for the moment.

An image of NVIDIA's stock chart since the beginning of 2023 up till 29/06/2023

For the chip industry as well as the American economy as a whole, the trends that will play out over coming trading days are as yet unknown. Traders will have to wait and see how policymaking and the market mood interact.

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