The trigger was a 26.5% drop in shares of retail giant Target after it missed earnings estimates due to higher costs, inventories, and supply chain issues
The previous day Wal-Mart fell 11% due to a similar issue, and yesterday it lost another 6.6%.
Expert companies were not able to manage supply chains and distribution to avoid large losses derived from bottlenecks in logistics and the increase in the price of products, so fear spread in the markets.
The market was already sensitive to the potential negative effects of inflation and supply problems on the economy. However, in previous days it kept some hope that the situation could be temporary, given some indications that the peak of price increases had been reached. The Federal Reserve regained control, especially after Jerome Powell's statements the day before. The Fed chairman was determined to tackle inflation while ruling out the possibility of aggressive increases above 50 bps. All this depends on the inflation and growth figures published in the coming months.
But it is also true that many analysts and relevant investment banks continued to be pessimistic about the economy's future with forecasts of a recession and without seeing a bottom for falls in the stock markets.
Target reported its biggest drop in more than 30 years, losing almost 30% of its stock market value. This move suddenly changed the market sentiment that was already more concerned about the growth of the economy than about inflation or interest rate hikes.
In this risk aversion scenario, stock indices sank more than 5%, as Nasdaq did. Investment flows were directed towards safe-haven assets such as the US Dollar, which strengthened against all its peers. Treasury bonds were also in focus, with yields falling too. The 10-year was at 2.88%. Even gold saw some gains, around $3, even with a stronger US Dollar.
Therefore, investors will be more interested in knowing the growth figures of the economy, such as the leading indicators, PMIs, or consumer confidence, as well as those of retail sales and, of course, the GDP. Employment data may also be negatively affected. And in the face of this potential new situation, the question is how the Fed will act, whether it will be able to comply with the rate hike plan or whether it will be forced to be less aggressive to not further harm an already wounded economy.
Sources: Bloomberg.com, reuters.com
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