Crypto Fears and Hawkish Fed-Speak Spur Losing Session on Wall Street

Investors were knocked down again by a sudden drop in cryptocurrencies, as well as hints the Federal Reserve is now open to pulling out of the bond-buying business.

(Barbara Leonard photo/Courthouse News)

MANHATTAN (CN) — Unable to catch a break, Wall Street posted another losing week, this time driven by a panic among cryptocurrency traders.

The Dow Jones Industrial Average did gain some on Friday but fell 174 points for the week, while the S&P 500 dropped 17 points and the Nasdaq actually managed to eke out a 41-point gain for the week.

What started as a precipitous plunge for Bitcoin earlier this month deepened Tuesday amid statements from the Chinese central bank that cryptocurrencies could not be used or accepted as a form of payment.

Cryptocurrencies were able to recover some of those losses on Wednesday and Thursday, but the markets were scarred by the sharp drop. “Cryptocurrencies were always highly volatile,” wrote market analyst Milan Cutkovic at AXI Trader, “but investors will likely need some time to recover from this week’s dramatic price action.”

On Friday, China again put cryptocurrency in the crosshairs, with the regime’s State Council Financial Stability and Development Committee vowing to crack down on bitcoin mining and trading.

This followed a promise by the Biden administration on Thursday to start taxing crypto transfers of a fair market value of at least $10,000, treating the virtual currency much the same as cash transactions. The tax report notes that “cryptocurrency already poses a significant detection problem by facilitating illegal activity broadly including tax evasion.” It also cited reports suggesting crypocurrencies are being used as “super tax havens” despite their relatively minor use as business income.

By the closing bell on Friday, bitcoin had dropped about $6,000 for the week, while Ethereum — which took a major hit earlier in the week only to stabilize somewhat on Friday — fell more than $900 since Monday.

Other factors spooked investors this week, including a sudden change at the Federal Reserve regarding its approach to quantitative easing. Investors tend to view quantitative easing, or the process of the Fed pulling out of markets, as having a short-term negative effect. Some, though, see it as necessary to preserve the economy as inflation peeks its head up.

In typical Fed-speak, minutes from the central bank’s Federal Open Market Committee reveal that a “number of participants suggested that if the economy continued to make rapid progress toward the committee’s goals, it might be appropriate at some point in upcoming meetings to begin discussing a plan for adjusting the pace of asset purchases.”

The revelation that the Fed essentially was “thinking about thinking about” tapering, and mulling changes to its massive bond-buying program, provided a jolt for investors.

The presidents of the Philadelphia and Dallas Federal Reserve banks have publicly stated their support for tapering. On Friday, Patrick Harker said, “We should start to have a conversation about sooner rather than later,” adding it might be good to taper bond purchases “carefully, methodically, I would even argue boringly, so that we don’t surprise the market.”

Some warn the Fed will still take its time, though, especially with Jerome Powell at the till. Tom Essaye of the Sevens Report noted that “no one should get their hopes up about a tapering discussion any time before the [Fed’s] June meeting” as it should be assumed a minority at the central bank are pushing for tapering.

“Bottom line, the FOMC minutes provided a mild hawkish surprise on Tuesday, and while the knee-jerk reaction from stocks was a decline,” Essaye wrote. “In this instance, the Fed at least acknowledging that tapering will be needed at some point provided some comfort to the markets the Fed hasn’t gone dovishly crazy.”

Essaye noted, however, that “the stakes are high because if the Fed bungles it, then we should all prepare for a difficult stock and bond market for the back half of 2021 and (at least) early 2022.”

Despite the recent rough times on Wall Street, analysts and economist remain bullish on the U.S. economy. According to data from the Atlanta Federal Reserve, gross domestic product is set to grow more than 10% during the second quarter of this year, down from 13.7% earlier this month after the ISM manufacturing index was released.

DataTrek Research analysts attribute this to the dismal April jobs report, which already had caused markets to fizzle, though other dips occurred in response to hints of inflation in last week’s releases of the producer price and consumer price indexes.

Another positive indicator is the slight drop in new unemployment claims. For the week ending May 15, only 444,000 initial claims were filed, compared with 478,000 claims the prior week. This is the third-straight week that new claims came in at lower than 500,000 claims, before revisions.

But even this data point hides a worse reality. James Knightley, chief international economist at ING, wrote that, despite the dropping unemployment claims, “we cannot get away from the fact that virtually all business surveys suggest companies want to hire, but are struggling to do so.”

Knightley predicts there are three or four months of labor issues, while competition for workers remains strong. “A good indictor to watch here is the ‘quit rate,’” he wrote, referencing the number of workers leaving their current role to join another company. “We expect it to rise to a new all-time high versus the current 2.4% figure, currently matching its all-time high.”

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