Fed hawks and multiple risks slay stock markets
07:49, 6 January 2022
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.
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.