Stocks began the week in a decline as investors thread carefully while waiting for decisions on interest rates in the coming days. This follows the worse week for stocks in most parts of the world since they dipped to their lowest this year in June.
Tumbling Shares and the Wait
Shares in Europe and the US dropped sharply, likewise for those in Australia, China, and Hong Kong. Japan has no activity due to a national holiday while the UK also has no activity as it observes national mourning in respect of the late Queen. There was no cash trading in the course of the European and Asian sessions.
Note that the S&P 500 index dipped by close to 5% in the past week which was its poorest outing since the 17th of June. While that happened, the two-year Treasury bond yields also performed poorly, ending the week at 3.87%. The market’s apparent weakness is a result of its expectation that the Federal Reserve would implement a huge interest rate increment at its policy meeting on Wednesday, as well as concerns that the hawkish policies will lead to a recession.
Investors also expect to be faced with volatility on other fronts such as the Bank of Japan, the Bank of England, and others that are set to announce their policy decisions. The British Pound fell to its lowest depth against the US Dollar on Friday while the Japanese Yen continued to be pressured. The US Dollar index experienced just a little change in that time.
Re-positioning for the Days Ahead
JPMorgan’s Wendy Liu said to Bloomberg that everyone needs to wait till the Feds announce the new interest increment and then understand the direction.
The stock market’s slump got deeper when the US inflation report forced traders to increase their bet on the Federal Reserve’s rate decision. They generally priced in 75 basis points while some priced in 100 basis points of a rate increase when the Feds meets.
Traders, in a short period last week, priced in the Federal Reserve’s major policy rate to peak at 4.5% in March which the Reserve intensified efforts to curb inflation. The peak went up by a percentage ever since the last meeting of the Feds in July.
Citigroup’s Head of European Currency Strategy, Vasileios Gkionakis, wrote in a clients’ note that it is obvious that the Federal Reserve will show hawkishness as it re-iterates its commitment to curb inflation at any cost. Since the Federal Reserve’s hawkish position is fully priced in, a lot will now depend on positioning in the days ahead.