- The tech rally became unsustainable on Friday.
- Market participants increased the likelihood of a Fed rate hike this year to 35.6%.
- This week, traders will focus on the FOMC minutes.
Equities regained some ground after pulling back at the end of last week due to a decline in the tech sector. Volatility was low on Monday, with no major reports and stalled talks between the US and Iran. Market participants are looking forward to the FOMC meeting minutes due on Wednesday.
Stocks rally (Source: Bloomberg)
Despite a retreat on Friday, equities reached new record highs last week amid strength in the tech sector. Traders were still riding the recent solid earnings in the sector, which have propelled the stock market despite the Iran war and hot inflation. Tech companies have shown solid growth in the first quarter, and AI optimism continues to draw more investment.
However, after weeks of this rally, it became unsustainable on Friday. Experts have pointed to profit-taking, which might continue in the coming days.
“The group has witnessed an extremely unsustainable move in recent weeks and remains vulnerable to profit-taking regardless of the headlines,” wrote Adam Crisafulli of Vital Knowledge.
The pullback on Friday was also likely a delayed response to the hotter-than-expected US inflation figures. The CPI report released on Tuesday showed consumer price pressures increased by 3.8% in April. The number beat the forecast of 3.7% and was a big jump from 3.3% in March.
Moreover, a separate report on Wednesday revealed an unexpected 6% increase in wholesale prices. The spike in price pressures comes amid uncertainty in the Middle East, which has boosted oil prices. Expensive oil leads to higher prices for goods and services. As a result, there is increased pressure on the Fed to cool down the economy.
After the inflation numbers, market participants increased the likelihood of a rate hike this year to 35.6%. Higher borrowing costs would hurt businesses and weigh on the equities market.
Meanwhile, the stalemate between the US and Iran continues. With no peace deal between the two nations, the conflict could escalate in the future. Additionally, the continued closure of the Strait of Hormuz will keep oil prices elevated and inflation climbing.
This week, market participants will focus on the FOMC minutes, which could provide more clues about future policy moves.
