Stock markets have now sunk into a depth of two years as they opened on Friday while bonds dealt with an eight-week loss. Investors are taking in the possibility of a higher aggressive interest rate increase from the US Feds whereas the money market is still reeling from the volatility caused by the Japanese intervention to push the Yen up a bit.
Central Banks Align with the US Feds
Interest rates soared this week after the decisions of the central banks in the US, Sweden, Britain, Norway, and Switzerland amongst others. But the US Federal Reserve’s indications that interest rates would continue to rise into 2023 and possibly throughout the year, was responsible for setting off the recent round of market selloff.
The MSCI index that monitors stocks around the world dropped to its lowest level on Friday since the middle of 2020. Note that the index lost about 12% during the month, or better still, since the Jackson Hole event where Jerome Powell announced to keep raising interest rates till the job of bringing inflation down is done.
The Euro lost again for the fourth day in a row after reports showed that the German economic downturn has gotten worse since September. This is the result of the energy crisis faced by households and businesses, as well as the effect of high inflation.
Stocks in Europe were in the red for the second day as the pressure losses mounted from every sector from natural resources to technology and banks. The STOXX 600 index went down by 0.5% in the early hours of trade. The DAX in Frankfurt incurred a loss of 0.6% to become one of the worst-performing indexes in Europe.
In for the Foreseeable Future
The FTSE in London lost 0.1% due to the Pound Sterling’s fall into a 37-year depth. The Chief Strategist of CaxtonFX, Michael Brown, is of the opinion that almost anything else aside from central banks’ policies and inflation reports is merely noise for now. The market is almost entirely fixated on how interest rates would rise throughout developed markets, and especially how long they would remain high.
He continued by saying that the message of the Federal Reserve, on Wednesday, as it announced new rates was clear. Interest rates will go higher than what the market is envisaging, and policy will be restrictive for the foreseeable future. Brown says it is nearly impossible to hold stocks for long or invest in treasuries, therefore, it’s not surprising that they are both seeing a selloff.
With the new rates regime now clear, the US Dollar rose to its highest level in twenty years. Yields on the ten-year Treasury also increased after investors dumped assets that are usually sensitive to inflation.