Proflex Market Update - Wk 03

We are back with weekly review of markets.

Market Sentiment Shaken by PMI and Employment Reports

Last week brought a wave of market jitters as economic data painted a picture of potential inflationary pressures:

• The PMI report showed higher purchasing costs, signaling rising input prices for businesses.

• A better-than-expected employment report followed, reinforcing concerns about a still-hot labor market and its impact on inflation.

These data points heightened fears that the Federal Reserve may remain hawkish longer than markets had hoped, adding to existing uncertainties.

Fed Minutes Signal a Shift in Tone

The minutes from the last FOMC meeting further spooked investors by revealing a more hawkish stance, influenced by political expectations rather than hard data:

• Trump’s Tariffs: The Fed explicitly mentioned potential inflation from Trump’s expected tariff policies, even though these policies are not yet implemented, nor has their impact been measured.

• A Political Fed?: During the Biden administration, Powell consistently emphasized a “data-driven approach”, but this recent shift has markets questioning the Fed’s objectivity in the face of political changes.

Bond Yields Spike, Markets Sell Off

The combination of hawkish Fed minutes and inflationary data created a perfect storm:

• 20-Year Treasury Yields surged past 5%, and the 10-Year Yield broke above the critical 4.7% level.

• These moves in bond yields sent shockwaves through the stock market, triggering a broad selloff, with tech stocks bearing the brunt.

We believe this is a "warning level" bond yields and if we come close to 5% mark or breach that, it would start breaking a lot of things in the market.

For now, we recommend one to be cautious in their approach and review the leverage for margin traders, while we wait for market reaction to settle down and find a direction.

Market always over-reacts before coming back to the mean and there is a good chance that bond market may stabilize in coming days as we are seeing significant dollar strength and demand for US treasury is stable.

Gold Shines Amid Dollar Strength

Despite the dollar’s rally, gold continued its upward momentum, underscoring its role as a hedge against uncertainty:

• Gold’s Resilience: This rally is particularly impressive given the typically inverse relationship between gold and the dollar.

• Global Highs: In many non-USD currencies, gold is already making new all-time highs.

• Outlook: If the dollar tops out in the coming weeks, gold could see an even stronger rally in USD terms, potentially solidifying its position as a key asset in 2025.

Bitcoin seeing heavy selling as

Bitcoin is facing notable pressure as broader market sentiment has turned negative. Rising bond yields, a surging U.S. dollar, and concerns about persistent inflation have created a challenging environment for risk assets, including cryptocurrencies.

Market is also waiting for news-flow as we approach the inauguration of a pro-crypto Trump administration. We believe that volatility is part of investing in crypto and one should keep patience in current environment.

Focus Shifts to CPI This Week

All eyes are now on the upcoming CPI report, which will either confirm or challenge the market’s worst fears:

• If inflation remains elevated, the Fed’s hawkish stance could harden further, keeping pressure on bond yields and equities.

• If inflation moderates, it may provide some relief, though the Fed’s recent tone suggests a high bar for changing their current trajectory.

Having said that, there are some warning signs in worldwide bond markets, with UK bonds facing a meltdown and many other countries facing concerns with respect to inflation coming back again.

We will review the situation after this week's CPI numbers and share with our subscribers whether we are seeing clear warning signs. For now, market's caution is good for health of risk assets. We do need healthy corrections to sustain one of the longest bull market that has benefitted us immensely in building long term investment portfolio.

Looking Ahead

The current market environment is undeniably challenging, but it also presents opportunities:

• Despite headwinds from policy action, we believe that the underlying economic growth is resilient and we can continue to see good performance from tech stocks
• Commodities are making a comeback despite strong dollar showing resilience in the market.
• Earnings will be crucial in next few weeks.

Proflex All-Access Continues to outperform the markets

Beyond delivering returns, we take immense pride in continuing to educate our community on evolving market trends, macroeconomic dynamics, and high-conviction opportunities. Together, we’re building a smarter, more informed investment journey, and we’re excited to carry this momentum into 2025 and beyond!

Best regards,

Raman Bindlish

Editor-in-Chief,

Blockstart Research

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