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The Fed minutes of meeting for July suggest that the central bank will cut down on its pace of bond purchases before the year-end. this could possibly mean a liquidity shock for the market.
On Wednesday, August 18, the Down Jones Industrial Average (INDEXDJX: .DJI) fell for the second consecutive day. The Dow Jones tanked 1% or 380 points giving a close under 35,000 levels.
The broader market correction across the US Stock Indices came as the Federal Reserve is mulling to taper its stimulus measures ahead this year. The S&P 500 (INDEXSP: .INX) also tanked 1% dropping 47 points and closing at 4,400 levels. After hitting the all-time high earlier on Monday, S&P 500 has tanked nearly 2% so far.
During its July meetings, the Federal Reserve made plans to pull back its bond-buying scheme before the end of 2021. The minutes of the meeting notes:
“Looking ahead, most participants noted that, provided that the economy were to evolve broadly as they anticipated, they judged that it could be appropriate to start reducing the pace of asset purchases this year”.
The Fed executives also noted that the economy had reached its inflation goals. Besides, they seem to be nearly satisfied with the progress of the job growth.
However, not all Fed members agreed to the bond tapering measures by the year-end. Some reflected the view that the Fed must further postpone it up to the end of 2022. However, there’s also been growing support to announce the tapering measures in September and start acting upon them by early October. Looks like the Wall Street is bracing for more volatility in the market ahead. Speaking to CNBC, Rockland Trust’s Rachael Aiken told:
“There’s just this uncertainty as we hand off fiscal and monetary policy to the economy to run on its own. I think the market is going to continue to feel volatility around that.”
S&P 500 Heading for 7% Correction – BoA
In a note to clients on Tuesday, the Bank of America Corp (NYSE: BAC) analysts noted that the S&P 500 could be heading for a 7% fall as the risk of credit spreads increases. As said, the S&P 500 is already down 1.8% since Monday.
As per BoA, we can see another odd 250 points correction from the current levels. The Wall Street banking giant noted:
“Rising credit spreads suggest deteriorating credit conditions as the SPX has embarked on its summer rally. We view this as a bearish divergence and risk for US equities”.
In another bearish expectation, BoA affirmed that the cumulative net volume in S&P 500 has been on a decline. The BoA has offered some potential levels of support of 4,164 levels.
On the other hand, concerns regarding the spread of the delta variant have spiked up once again. Chris Zaccarelli, chief investment officer for Independent Advisor Alliance, said:
“In the short run, the market is going to remain focused on growth and delta variant concerns, but as we move past those challenges, the good news about the economy and job market should give investors a renewed boost of confidence and that is what will drive the market to new highs before the end of the year”.