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Recession vs inflation: Rising interest rate winners and losers as Fed tightens the screw

18:42, 29 July 2022

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  • AAPL
    Apple
    138.07 USD
    -3.95 -2.780%
  • AMZN
    Amazon
    113.19 USD
    -1.63 -1.420%

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Winners and losers
Are there any winners and losers on Wall Street after Fed's latest rate hike?

Now that the US Federal Reserve has announced its latest interest rate hike to cool inflation and the market has priced-in a potential recession, the winners and losers on Wall Street are beginning to surface.

From the usual havens in utilities (XLU) and real estate (XLRE) during economic downturns, to a return to growth stocks in big tech like Apple (APPL) and Amazon (AMZN), traders are now positioning themselves for the bear market rallies to come.

Winners: The usual suspects + Mega-cap tech

Edward Moya, senior market analyst for OANDA in New York told Capital.com, “A strong recession signal has brought defensive trading back to life on Wall Street, with utilities and real estate soaring.”

“The second consecutive quarterly contraction suggested that stagflation is here, as traders prepare for additional bear market rallies down the road,” he said.

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Real Estate (XLRE) price chart

Moya added, “Mega-cap tech will also become a safe-haven trade during the recession.”

“The go-to trade on Wall Street will be companies rich with cash, decent product cycles, and earnings momentum, while the traditional investor may gravitate towards typical defensive stocks,” he continued. “Massive earnings from Apple and Amazon are also providing a boost for risk appetite."

Amazon (AMZN) price chart

Losers: Low earnings companies + US economy

With inflation at its highest level in four decades, ongoing supply chain issues related to the Covid-19 pandemic, and the likelihood of a recession, “Traders should avoid companies with no earnings and high debt,” Moya warned.

AMC

6.98 Price
-2.400% 1D Chg, %
Long position overnight fee -0.0308%
Short position overnight fee -0.0137%
Overnight fee time 21:00 (UTC)
Spread 0.08

AAPL

138.07 Price
-2.780% 1D Chg, %
Long position overnight fee -0.0064%
Short position overnight fee -0.0059%
Overnight fee time 21:00 (UTC)
Spread 0.05

TSLA

266.12 Price
-0.860% 1D Chg, %
Long position overnight fee -0.0308%
Short position overnight fee -0.0137%
Overnight fee time 21:00 (UTC)
Spread 0.14

AMZN

113.19 Price
-1.420% 1D Chg, %
Long position overnight fee -0.0064%
Short position overnight fee -0.0059%
Overnight fee time 21:00 (UTC)
Spread 0.13

While the market anticipates a slower pace of tightening from the Fed, “it is premature,” he said. “Inflation will likely not ease quickly, so the aggressive stance to fight inflation will not drastically change.”

US economy: Burned by inflation, stalled by potential recession

In an interview with Capital.com, Joey Von Nessen, a research economist at the University of South Carolina’s Darla Moore School of Business, said “two consecutive quarters of negative growth is concerning, but part of what’s driving the slowdown is temporary.”

According to Von Nessen, there are two major factors driving today’s GDP estimates including high inflation and rising interest rates, and “it can be observed in the housing markets, where demand has pulled back in 2022 as mortgage interest rates rise.”

“However, we’re also in a period of transition as consumers slowly return to normal spending patterns,” he added. “The bottom line is that uncertainty remains high as we look ahead to the second half of the year, which will likely translate into increased market volatility.”

 

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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.
Capital Com is an execution-only service provider. The material provided on this website is for information purposes only and should not be understood as an investment advice. Any opinion that may be provided on this page does not constitute a recommendation by Capital Com or its agents. We do not make any representations or warranty on the accuracy or completeness of the information that is provided on this page. If you rely on the information on this page then you do so entirely on your own risk.

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