Fed worries erase 2023 market gains
Market Summary
Last week, investors focused on the sharp pull-back of US stocks and decline in Europe shares due to concerns over the possible impact of prolonged high interest rates.
In the United States, stocks plummeted as Jerome Powell’s testimony in Congress suggested that policymakers are ready to accelerate tightening and increase rates beyond expectations if inflation persists. The unemployment rate rose unexpectedly, however, from a January five-decade low of 3.4% to 3.6%. European stocks fell, along with the global markets, due to worries about the strain in the banking system. The UK economy bounced back by 0.3% in January, due to service sector expansion following a decline in December.
In Asia, stock markets in Japan showed slight increases over the week. The 10-year Japanese government bond yield decreased to 0.42% by the end of the week, from 0.50% the previous week, due to the central bank's continued commitment to its ultra-loose stance. The yen weakened to about JPY 136.7 against the U.S. dollar, from around JPY 135.8 the prior week. Chinese stocks declined due to the announcement of a weaker demand and a growth target for 2023 below expectations by the Chinese government. Core inflation rose 0.6% in February from 1% in January.
Major News
Greek government faces pressure as railway workers continue to demand updated safety protocols following a train crash that killed 57 people.
China's National People's Congress appointed Li Qiang, the former party chief of Shanghai, as the new prime minister, with a reduced role in managing the economy.
Regulators shut down Silicon Valley Bank due to a run on the bank, with the FDIC taking control of its $175bn deposits, causing the S&P 500 to drop by 1.5% on Friday, marking its worst week since September.
Meta is set to lay off approximately 13% of its workforce, which is equivalent to the number of employees it fired last year due to declining revenue.
What Caught Our Attention
Options trading in America, once limited to professional investors, has surged since the pandemic began, with retail investors using options to gamble or magnify their bets.
There was a surge in number of retail traders who use zero-days-to-expiration (ODTE) contracts to speculate on sharp price movements, according to a Journal of Finance report. However, market analysts have warned that 0DTE options pose a systemic risk as they may force investors to trade large amounts of underlying securities if intra-day price changes occur and they do not hold positions in those securities.
Retail traders, who now account for 48% of trading volume in options, bought twice as many calls as puts between 2020 and 2021, but these traders have collectively lost $2.1bn on options between November 2019 and June 2021 while brokers have made $2bn from options trading in 2022. Just like casinos, in options trading, the house always wins.
Source: Kredens Capital, T. Rowe Price, Bloomberg, Financial Times, Wall Street Journal, The Economist, Nikkei Asia
