Monday brought a veritable pogrom to the financial markets. Virtually everything was cheaper: stocks, bonds, gold, cryptocurrencies and commodities. This is the consequence of fears that the Federal Reserve will be forced to tighten its monetary policy so severely that it will put the economy into recession.
Belief in the so-called soft landing disappeared after the release of Friday’s CPI inflation data in the US. The May reading beat the expectations of all market economists and fueled speculation of sharp interest rate hikes from the Federal Reserve. The futures market is now pricing in a chance of a rise of even 75 basis points. already at Wednesday’s FOMC meeting. For now, that chance is pegged at less than 30%, but the Fed hasn’t taken such sudden action in decades.
It’s more likely that by the end of September, Powell and company will raise the cost of the loan by a total of 150 to 175 basis points. (i.e. three 50bp hikes with a chance for one of 75bp) and that by the end of December the fed funds rate will “hit” 3.25-3.75%. If that happens, it will be the biggest monetary policy tightening in the US in 28 years (and let’s not forget that aside from that, the Fed just launched a balance sheet reduction program – QT).
The Fed claims to have brought inflation under control. The Fed has no control over this and they may have gotten out of control. I don’t see panic selling yet, but it looks like it’s happening, Ken Polcari, chief market strategist at SlateStone Wealth, told Reuters.
In today’s financial markets, everything revolves around credit. If its price rises, almost all financial assets fall. And that’s what happened on Monday. The biggest victim of the shift in investor perception has been debt. The yield on 10-year US government bonds rose 22 basis points. (!), rising to 3.38% and reaching its highest level in over 10 years! US 2-year yields rose nearly 27 basis points to 3.34%, the highest level since 2008. Rising yields signal a decline in the price of the bond market.
In the context of what was happening in the Treasury market, declines on Wall Street seem like a trivial game. The S&P500 fell 3.88% and closed at 3,749.61 points. In this way, the S&P500 broke the May low and was at its lowest since January 2021. The S&P500 fell 22% below the peak of the bull market and thus exceeded the agreed bearish limit.
– It will be very difficult to raise the stock markets as the Fed continues to apply hawkish pressure. It is impossible, from an economic point of view, to curb inflation without slowing GDP growth. It’s funny that we still have people denying the coming recession – said Victoria Greene, chief investment officer at G Squared Private Wealth, as quoted by PAP.
The Nasdaq plunged 4.68% and finished with 10,809.23 points. It is also a breakout of the bear market and the lowest level for this index since November 2020. The Dow Jones fell 2.79% and fell to the level of 30,516.74 points.
An even bigger pogrom has taken place in the cryptocurrency market. Bitcoin quotes fell 15% and Ethereum nearly 16%. In this way, the price of BTC fell to the lowest level since the end of 2020. You can read more about this in the article titled “Pogrom in the cryptocurrency market”. Not only was “digital gold” cheaper. The Real Thing was discounted 2.7% today at $1,823.70 an ounce. Most commodities also fell, with palladium (-7.5%), nickel (-5.4%), wood (-7%) and platinum (-4.7%) suffering the most .