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Fed hawks and multiple risks slay stock markets

By Adrian Holliday

07:49, 6 January 2022

Stock market indices shown on a screen
The S&P 500 Index closed almost 2% lower yesterday while the tech-heavy Nasdaq was hammered 3.3% – Photo: Shutterstock

A warning from the US Federal Reserve yesterday that interest rates may lift sooner, faster, saw European equity markets open sharply lower on Thursday morning.

European markets followed their peers in the Americas and Asia-Pacific region lower, with the FTSE down 1% at 7,440 in the first half hour of trade, while the Euro Stoxx 50 shed 1.7%. Hong Kong’s Hang Seng Index fell more than 1.5%, despite a chunky 4.6% fall in the previous session.

The Fed's December open market committee (FOMC) meeting minutes released on Wednesday showed real appetite to cut the central bank's huge bond-buying program, which has buoyed financial markets through the pandemic – an end to easy money.

Responding, the S&P 500 Index closed almost 2% lower yesterday while the tech-heavy Nasdaq was hammered 3.3%. The more hawkish expectations saw US yields rise, hitting gold valuations – down -0.44% to 1,802.18. Traditionally, the commodity has an inverse, although unreliable relationship, with the dollar.

Earnings risk up

However, the FOMCs December discussions were pre-Omicron, which at the time was not considered a big deal.

HK50

16,986.50 Price
-1.820% 1D Chg, %
Long position overnight fee -0.0263%
Short position overnight fee 0.0044%
Overnight fee time 22:00 (UTC)
Spread 5.0

US30

35,516.10 Price
+0.410% 1D Chg, %
Long position overnight fee -0.0262%
Short position overnight fee 0.0040%
Overnight fee time 22:00 (UTC)
Spread 2.2

US500

4,553.60 Price
+0.040% 1D Chg, %
Long position overnight fee -0.0262%
Short position overnight fee 0.0040%
Overnight fee time 22:00 (UTC)
Spread 0.8

DE40

16,177.40 Price
+1.270% 1D Chg, %
Long position overnight fee -0.0221%
Short position overnight fee -0.0001%
Overnight fee time 22:00 (UTC)
Spread 2.0

FOMC members, said Ian Shepherdson, chief economist at Pantheon Macroeconomics, “expect inflation to fall this year, but most have revised up their forecasts and believe the risks are mostly ‘weighted to the upside’”.

Shepherdson added that the committee, “voted unanimously to double the speed of the taper, so QE [quantitative easing] will end in March, but they have left themselves room to make further changes to the pace of QE if circumstances change, in either direction”.

Many stock market valuations are highly connected to future earnings and therefore highly exposed to rising interest rates. The yield on US 10-year bonds increased two basis points, piling on further gains made since the year began.  

Crypto markets were also down with bitcoin at $43,232, down more than 6.7% in the last 24 hours, although this fall softens to 8.29% over a full week.

Read more: APAC stocks drop as hawkish Fed sparks risk asset sell-off

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The difference between trading assets and CFDs
The main difference between CFD trading and trading assets, such as commodities and stocks, is that you don’t own the underlying asset when you trade on a CFD.
You can still benefit if the market moves in your favour, or make a loss if it moves against you. However, with traditional trading you enter a contract to exchange the legal ownership of the individual shares or the commodities for money, and you own this until you sell it again.
CFDs are leveraged products, which means that you only need to deposit a percentage of the full value of the CFD trade in order to open a position. But with traditional trading, you buy the assets for the full amount. In the UK, there is no stamp duty on CFD trading, but there is when you buy stocks, for example.
CFDs attract overnight costs to hold the trades (unless you use 1-1 leverage), which makes them more suited to short-term trading opportunities. Stocks and commodities are more normally bought and held for longer. You might also pay a broker commission or fees when buying and selling assets direct and you’d need somewhere to store them safely.
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