Crypto meltdown, US Midterms, Elon sells $4b of Tesla stock, Peak Inflation, and the biggest one day rally in 2 years?

Action last week on markets was consistent with many weeks during this year with extreme levels of market volatility.

The positive is that we ended the week higher than what it started with at the beginning of the week.

The collapse of FTX

When you think your portfolio has had a bad day, take a second to think about Sam Bankman-Fried, the founder of FTX and crypto entrepreneur who had a for tune of over $15 billion USD earlier this week.

He saw his wealth fall over 94% in a single day to around $1b after a competitor sold down their entire stake in ‘FTX Token’ which led to a liquidity crunch. Many feel that his business and the token  were effectively a ‘ponzi scheme’, so there’s probably no need to be too sympathetic towards his balance sheet (world’s smallest violin is playing just for him).

However this led to large falls in other cryptocurrencies and a contagion effect on equities as people took a ‘risk off’ approach onto what that would mean for markets.

Uncertainty is never good for markets, and this will take a little while to sort out.


US Midterm elections

The US had midterm elections earlier this week and the ‘Republican wave’ failed to materialise the way the market was hoping. This led to a decline in stocks as the market was hoping for a split government which is often good for share prices. Markets love certainty, and they were hoping for a split to reduce the likelihood of tax rises.


Elon Musk selling Tesla shares

Elon Musk sold down approximately $4 billion in Tesla stock to help him with funding his Twitter acquisition.

This placed significant pressure on Tesla stock and it is down about 15% over the past 5 days. There is also fear that Twitter will distract from his focus with Tesla and its strategic direction.

What does this mean for Tesla over the short term?

There is going to be volatility as the market doesn’t know if Elon needs to sell more stock or not given that Twitter is not profitable and advertisers appear to be leaving the platform.

Tesla continues to be a well-oiled machine and the long-term outlook remains positive.

So ultimately, our opinion is that Elon is giving us a generous discount to take his Tesla stock off his hands (thanks Elon).


Lower October inflation leads to a one day rally

Thursday saw the US Consumer Price index results come out with an increase of 0.4% in the month of October, and 7.7% year on year. Prices declined for areas such as medical services, used cars and clothing.

The US Fed’s aggressive path with interest rate rises is starting to work, and although inflation is still a problem, it has trended down from its level of 9.1% in June as detailed by the chart below.

The market reacted positively overnight as they were expecting inflation to be higher, and that saw the largest one-day rally in markets in 2 years.

In particular, the tech sector (Nasdaq up 7.35%) and Innovation (ARKK up 14.52%) recovered from the hammering it took the day before from the response to the FTX meltdown.

Over 2 days, the cumulative gains over that period were even more pronounced as below:

So where here from now?

It’s impossible to know what will happen over the next couple of months, as we have seen many bear market rallies during 2022. However, if we see November inflation also trend downwards, then we may see the US Federal Reserve ‘pivot’ by either slowing down the rate of interest rate rises into 2023, or even potentially pausing them early next year.

Like much of this year, we will continue to see bouts of red and green in the markets as they try to get a clearer view of where inflation, interest rates, unemployment and economic growth are headed.

So as we approach this Christmas, let’s hope for more green than red, and for a little Santa Claus rally to end 2022.


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