On Tuesday, trading was quite choppy in the market, as global bonds and stocks gyrated after the market rout a day earlier. This week, investors are braced for a hike in the interest rate by the US Federal Reserve, which could be the largest that has been recorded in 28 years.
Fed Policy Bets
Last Friday, the consumer price index (CPI) data released in the US had turned out to be higher than expected. This had fueled bets that the Fed will tighten their monetary policy more aggressively in order to quell the surging inflation. On Monday, government bonds and global equities took a beating over concerns that a more aggressive tightening could lead to an economic recession.
Investors are now expecting that the Federal Reserve will hike the interest rate by about 75 basis points, which is the largest increase seen since November 1994. This decision is expected to be announced at the end of the Federal Reserve’s two-day policy meeting, which begins on Wednesday. Market analysts said that everyone has been waiting for this meeting and they will be listening to the Chairman of the Fed, Jerome Powell to gauge future impacts.
Indexes Remain Flat
In New York, the Dow Jones Industrial Average had remained flat in early afternoon trading, but the Nasdaq Composite and the S&P 500 climbed by 0.9% and 0.21%, respectively. There was also a 0.25% drop in the MSCI’s global index, which brought it to the levels that had been seen last in November 2020. There was also a 1.26% slump recorded in a pan-European stock index, as it reached lows last seen in March 2020.
Due to expectations of rising interest rates in the US, there was a rise in 2-year Treasury yields, as they hit 3.430%. This is the highest they have been since November 2007, while 10-year Treasury yields went up to 3.4620%, which brought them to an 11 year high. Yields of government bonds in the euro zone also reached multi-year highs, with spreads widening between periphery and core due to concerns about aggressive tightening of monetary policy.
Impact on Markets
Assets that were seen to benefit from the low interest rates were pummeled, such as crypto, stocks, emerging markets and junk-rated bonds. This was because investors priced in bets of much higher interest rates from the Fed. The S&P 500 also saw itself enter the bear market territory on Monday after the sell-off, as the index has declined by more than 20% since its last high in January.
According to analysts, the kind of monetary tightening that is taking place indicates that something is going to break. The stock markets are showing the impact of the first round of interest rate hikes and tightening financial conditions will make it worse. It should also be noted that US stock values are still higher than what they had been in the COVID era, which means that the market is in for some more pain before things start easing up.