(Kitco News) – Financial markets fell under pressure in early trading on Thursday after the advance estimate of second quarter U.S. gross domestic product (GDP) came in well above expectations, showing the economy grew at an annualized pace of 2.8% in Q2 versus the 2% growth expected by economists. The reading also blew away Q1 GDP, which was 1.4%.
The Personal Consumption Expenditures (PCE) Price Index and core PCE Price Index data were also released.
“The PCE Price Index rose 2.9%, above [the] expected figure of 2.7%. This is a key metric in predicting the Federal Reserve’s next steps when it comes to interest rate policy,” said Emma Wall, head of investment analysis and research at Hargreaves Lansdown. “While this is higher than target, it is falling and coupled with a robust economic growth figure, it lessens the pressure on the Federal Reserve to cut rates next week.”
“A Reuters poll of economists released yesterday revealed consensus view that the Fed will not cut until September from today’s 5.25-5.5% range,” she said. “The Fed has not cut rates since two emergency meetings during the pandemic in March 2020.”
The strong numbers indicate that the Federal Reserve has more time to reduce interest rates as private domestic demand remains solid, but the CME FedWatch Tool shows the market still puts the odds of a September rate cut at 100$%. The odds of a rate cut in July also rose to 9%.
Despite higher expectations for an interest rate cut, markets were hit with a widespread sell-off as the sudden downturn for Big Tech stocks spread like a contagion, with investors now reevaluating the ‘up-only’ mentality that has pushed valuations to record highs. Many also wonder when the bets these firms have put on artificial intelligence will pay off.
“Alphabet’s second-quarter results triggered mixed reactions despite exceeding earnings estimates,” said Daniel Van Der Woude, Product lead at Nuklai. “The stock slid 5% during Wednesday morning Asian hours, reflecting concerns over weaker-than-expected ad revenue and higher capital expenditure.”
“However, we remain optimistic about Alphabet’s AI opportunities,” he added. “Alphabet’s sustained investment in AI and cloud tech is noteworthy. The AI models developed by Alphabet’s DeepMind lab, particularly AlphaFold, are quite promising. However, questions linger on how these investments will impact traditional revenue streams.”
Investors were also spooked by a surprise off-schedule cut by the People's Bank of China (PBoC), which decreased its one-year medium-term lending facility rate to 2.3% from 2.5% – the biggest reduction since 2020 – injecting 200 billion yuan ($27.5 billion) of liquidity into the market
This was the second interest rate cut in a week and sparked concerns of instability in the world's second-largest economy.
These factors combined led to a negative open for the major stock indices, but conditions have improved over the past hour, with the S&P, Dow, and Nasdaq all managing to climb back into green territory for the day.
The same cannot be said for crypto and precious metals, which continue to trade in the red. At the time of writing, Bitcoin trades at $64,723, a decrease of 2.56% on the 24-hour chart. Gold is currently down 2.07% on the session and trading at $2,365.70, while silver has declined by 4.35% and trades at $28.04.
“Silver (XAG) dropped to its lowest price since the start of May on Thursday, and there are reasons for investors to be weary of a prolonged downturn after what has been an impressive few months for the commodity,” said Neil Roarty, an analyst at Stocklytics.
“The precious metal added around 40 percent to its value during the first half of the year. But close to 15 percent of those gains have been wiped off in the last week alone,” he noted. “Why the sell-off? Certainly some traders are simply booking a healthy return on a commodity that is notoriously volatile.”
“But there are some longer-term concerns at play too, particularly around fears that a Donald Trump victory in November’s US elections could reduce demand for the metal from the green energy sector,” Roarty said. “Combined with likely interest rate cuts during the latter part of the year, silver may struggle to fulfill its role as a safe haven over the coming months.”
According to Alex Kuptsikevich, senior market analyst at FxPro, the weakness of Big Tech along with other macroeconomic developments have negatively impacted the cryptocurrency market.
“The pressure on financial markets has spread to cryptocurrencies - the flip side of the long-desired easing of institutional access to the crypto market,” he said. “The launch of the Ethereum ETF coincided with the most powerful drop in the Nasdaq index in months. The cryptocurrency market lost 3.5% in the last 24 hours, pulling back at one point to $2.3 trillion, its lowest in 10 days.”
“Bitcoin (BTC) is down to $64.0K, once again approaching the 50-day MA where it consolidated for most of last week,” he added. “There are small hopes that the first cryptocurrency will gain support near this level.”
BTC/USD Chart by TradingView
“However, this week could be just the beginning of a decline from the upper boundary of the BTCUSD downtrend channel,” Kuptsikevich warned. “In this case, an important test of strength will be in the $60K area, where the 200-day MA and the significant milestone are held.”
“Ethereum (ETH) is already testing the 200-day MA, having lost over 9% in less than 24 hours to 3150,” he said. “In early July, the major altcoin steadily gained support after touching this curve. However, these purchases could be largely credited to the expectations of the ETF launch. Now, this speculative factor is out of play, multiplying sell-the-fact activity on top of global markets risk-off.”
But there is some cause for hope, Kuptsikevich noted, as “The Hash Ribbons indicator gives a signal to buy Bitcoin. On 23 July, the indicator came out of ‘capitulation’ for the first time in almost two months. Whenever this happens, an ‘explosive price rise’ follows, noted analyst Mikybull.”
#Bitcoin just witnessed a rare hash ribbon 'Buy' signal
Whenever this happens, an explosive rally follows. pic.twitter.com/ZsR07PTD7T— Mikybull ?Crypto (@MikybullCrypto) July 24, 2024
