Fed rate hike drags global financial markets into turbulence
European and US stock markets saw another massive drop on April 22. The three major stock indexes in the United States all fell substantially. On that day, the Dow Jones index fell around 1,000 points, the biggest one-day drop since October 2020 of 2.8%. The Nasdaq Composite Index fell 2.5%, losing more than 2% for two consecutive trading days. The S&P 500 index also fell 2.8%. Similarly, in Europe, the STOXX Europe 50 index fell by 2.2%, the UK’s FTSE 100 index fell by 1.4%, the CAC 40 index for France also fell by 2. .0% and Germany’s DAX 30 index fell 2.5%. The US dollar index reached 101.12, and major world currencies such as the euro, the pound and the yen, to varying degrees, depreciated against the US dollar. On the same day, US bond yields continued to rise. The 10-year US Treasury yield hit 2.944%; the 5-year US Treasury yield rose to 3.049% and the 2-year US Treasury yield rose to 2.7620%.
With rising global inflation, the war between Russia and Ukraine is still ongoing, and with the recent resurrection of the COVID-19 outbreak in China, European and US stock and bond markets have experienced a rare fall in the global capital market during the same period. .
The data revealed that the MSCI World Index fell 8.79% during the year and the Bloomberg Global Bond indices fell 9.96%. Globally, it was the first decline in at least 30 years, indicating heightened investment risk in financial markets and changing market expectations.
The Federal Reserve has hinted at an interest rate hike due to several factors. This helps explain the recent dramatic loss in European and US stock markets, as well as the significant gain in the US dollar, at least in the short term. On the same day, Fed Chairman Jerome Powell said the Fed may raise interest rates to combat rising inflation in the United States. Markets expect the Fed to raise rates by a total of 200 basis points by September, based on Powell’s remarks. This could mean 50 basis points of rate hikes in May, June, July and September, which could raise the upper limit of the target range for the fed funds rate to 2.50%. The rationale for federal policy is primarily to shift political attention to inflation control, in hopes of catching inflation faster and compensating for the federal policy of the previous year.
ANBOUND researchers have long warned that the Fed’s rapid rate hike will surely lead to two outcomes: slower US economic growth and increased volatility in financial markets. While the latest jobs report for the US economy is encouraging, rising rates have had an impact on the housing market. If inflation remains high for an extended period, it will hurt domestic consumption in the United States, stifle the country’s economic recovery, and possibly lead to stagflation. The 2-year US Treasury yield, which is more sensitive to the US economy, is currently approaching the 10-year US Treasury yield, signaling a likely economic slowdown in the US.
Zero interest rate policy followed by long-term quantitative easing after 2008 and expansionary monetary policy during the pandemic in 2020 caused the US capital market to explode. Soaring asset prices could have adverse consequences for the US economy. The S&P 500 is currently trading at around 22 times earnings, and overall values are higher than they were before the pandemic. Building on the historic pattern of rate hikes in 2018, the current pace of federal rate hikes should trigger equity restructuring and asset repricing. Currently, the US economy is dramatically different from the 2018 sprint for high-tech companies.
As inflation is too high this time around, the pace of rate hikes is likely to accelerate, further affecting corporate performance and valuations. Therefore, rapid rate hikes will cause further turbulence in financial markets. The Nasdaq Composite fell 9% in the first 15 sessions of April, according to market data. Some markets saw it as the second-worst performance in history since the same period in April.
When the Fed accelerates the upward trend in interest rates, risks in financial markets could increase even more, exacerbating volatility and market shocks. Not only would this hurt the United States, but it will also hurt global financial markets. This shock begins in the stock and bond markets, but it also quickly spreads to the currency and commodity markets. Amid expectations of a rate hike by the Fed, the US dollar will continue to strengthen, which could lead to further turmoil in global financial markets, impacting various currencies like the Chinese yuan and affecting emerging markets.
With the ongoing Russian-Ukrainian war, global industrial chain restructuring and the COVID-19 pandemic, capital markets do not see an optimistic outlook for the global economy, nor do they see central banks have solutions to fight against inflation. This turmoil is expected to continue to impact global financial markets for some time to come, rising and falling in step with inflation trends.