On Wednesday, European markets were rallying after the announcement of an emergency meeting by the European Central Bank (ECB) in light of the sell-off in the bond markets. Markets were also looking forward to the meeting of the US Federal Reserve, which was scheduled to hike its interest rate most aggressively since 1994.
No Quiet Run
Investors had been hoping for a quiet approach to the 75 basis points hike by the Fed, but these hopes were dashed quickly after the announcement of the ECB meeting. After all, it comes less than a week after the one that had been scheduled. This resulted in the market experiencing a lot of activity. There was a 0.75% jump in the euro, which saw it climb to $1.0487 and this brought down the US dollar index from its high of 20 years.
Debt worries in the eurozone had returned full force due to an eight-year high recorded in the Italian bond yields, but they fell under 4% for the day, making it the biggest decline in a day since March. There was also a 2.7% jump in the Italian stock market, as banks rose by almost 6%. There was also a 0.5% in European shares, while the euro hit a high of 16 months against the British pound, as the latter was suffering due to Brexit tensions.
Market analysts said that the plans of Christian Lagarde and the ECB to normalize the monetary policy slowly blew up because of the bond market’s reality. Now, the market is left wondering if it would be possible to normalize policy, or the ECB would have to introduce yet another bond-buying program to keep the market together.
Not a Good Year for Financial Markets
Since the beginning of 2022, financial markets have been dealing with crises after crises, such as the global surge in inflation and increasing borrowing costs. There has been a drop of 20% in world stocks and bond markets have gone through a rout. Likewise, there are also concerns that the drastic actions of the Fed could push the entire world into recession.
Overnight, Treasury yields had climbed to reach decade highs and the dollar had also reached a peak of 20 years. This was because futures indicated that the Fed’s interest rate hike would be of 75 basis points, rather than 50 and that is exactly what happened. It is the biggest increase recorded in interest rates since 1994 and markets believe that the end of the year would see rates hitting 3.75% to 4%.
The S&P 500 has already entered a bear market, rates are rising, inflation is at an all-time high, and recession concerns are growing. Even if inflation hits its peak, the market will still not see bottom until the Fed decides to ease its policy. This could take some time, which means investors really need to cut down portfolio duration and focus on real assets. Nasdaq futures, Dow Futures and S&P 500 futures were all up by 0.75%, 0.4% and 0.75%, respectively.