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Week of Turbulence: Markets Suffer Downturn Following Mixed Results from Applied Materials, Deere and Tesla

By:JJ Kinahan

Expiration Friday sparks volatility amid lingering market apprehensions

  • Equities, bonds and oil falter, raising concerns. Meanwhile, traders scrutinize housing sales and inflation trends.
  • Applied Materials rises and John Deere dips. Tesla cuts prices in China despite pledge.
  • Expiration Friday brings market uncertainty. A VIX increase hints at growing investor unease.

As the trading week nears its close, various asset classes are grappling with a spell of turbulence, setting a cautious tone for investors.

The S&P 500 faced a 2% decline this week, including a 0.8% dip on Thursday. The Nasdaq Composite experienced a more substantial drop of 2.5%, adding to its 7% month-long setback. The prospect of snapping a five-month winning streak for equities is looming as August approaches its conclusion.

The ongoing weakness in the markets extends beyond equities, as bonds, gold and silver also exhibit signs of vulnerability, contributing to a broader asset class downturn. This pullback in bond prices has consequently propelled yields to levels unseen since 2007. Such an ascent has translated into mortgage rates climbing above 7%, with projections suggesting they could ascend further to an astounding 8%. This trajectory of rate escalation is noteworthy, particularly when contrasted against rates observed just a mere year and a half ago.

One ripple effect of rising rates is the deceleration in housing sales. Upcoming reports on existing home sales are anticipated to confirm the trend, with a REMAX study indicates a decline in this sector. Elevated mortgage rates are prompting homeowners to refrain from seeking new mortgages, thereby constraining their movement and contributing to a reduction in available homes for sale. While discussions abound regarding the stability of real estate prices, it's arguable that this phenomenon is more stemming from supply shortages—genuine price appreciation.

The list of struggling assets extends to the oil market, a subject that has attracted recent attention because of its price surge. However, in the past week, oil prices have plunged by 7%, offering a partial relief from inflation concerns that were aggravated when initial jobless claims fell slightly short of expectations. The forthcoming "big tuna" monthly employment report is expected to be a pivotal marker, not only in terms of numerical revelations but also for gauging market reactions.

Shifting focus to individual stocks, the landscape presents mixed outcomes. Applied Materials (AMAT) has nudged upward in premarket trading following its earnings announcement and upbeat guidance for the next quarter. Conversely, John Deere's (DE) shares are down approximately 2% premarket despite surpassing expectations because the primary catalyst behind its success appears to be higher prices instead of increased unit sales. Tesla (TSLA) is facing a similar fate, with indications of a 2% decrease. The electric car manufacturer recently disclosed a price cut in China for its Model X and Model S by around $10,000, a decision that follows a previous reduction in lower-end models, despite an earlier commitment by Elon Musk to avoid such measures in China.

Today marks the expiration Friday, characterized by a significant notional expiration. Such days often invite heightened volatility, especially during opening and closing sessions. With the VIX resting just below 19, the current overall volatility aligns with historical averages. However, it's worth noting that the VIX dipped below 15 last week before gradually ascending this week. This creeping increase may signal growing investor unease amidst the ongoing pullback as the summer months end.

As always, the most prudent course of action is to adhere to your investment plan and long-term objectives. The insights provided here are for educational purposes, and this content does not constitute trading or investment advice, nor a recommendation for any specific investment product or strategy.

JJ Kinahan is CEO of IG North America—which includes tastylive, tastytrade and IG's FX Business. Kinahan traded for 21 years at the Chicago Board Options Exchange. He serves on the CBOE Advisory Board and the SIFMA Options Committee. @thejjkinahan

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