Bank of England is deeply concerned about the backlog of policy from the economic recovery, as the policy rate may be raised earlier than expected. The Pound sharply strengthened against its main opponents by more than one percent, but could not find equilibrium and went below 1.40 on Friday. The statement of the British Central Bank gave rise to a new wave of anxiety in the stock markets, as the world’s Central Banks sharply reduced the supply of dovish rhetoric and give the impression that they are rushing to raise rates, fearing that inflation will get out of control. The S&P 500 sank 3.75%, the bears slashed an additional 4% from the Dow during the trading session on Thursday. Stock markets of developed and developing economies have gone into negative territory, liquidity preference has increased dramatically (i.e. demand for cash), which pushes the world’s Central Bank to accelerate the implementation of restraining monetary measures. Correction reached the Chinese securities, which was caused by inflation without surprises at 1.5%, not confirming the favourable interpretation of data on the trade balance, imports and exports published on Thursday. The lack of reliable data on inflation in leading economies and the signals from the Central Bank about the reduction of quantitative easing creates additional risks, as in the case of incorrect forecasts, a return to mild rhetoric can provoke even higher volatility.
Why do American stocks fall? The yield of 10-year Treasury bonds has peaked since mid-2013 (which is the basic risk-free rate), which will lead to higher borrowing costs in the corporate debt market, i.е. the cost of investment for companies, which forces investors to drop shares, adjusting expectations. It is also logical that against the backdrop of a strong deterioration in expectations, the likelihood of a return to historical peaks and their overcoming is very low, given that the world’s central banks have decisively rejected the hope for continued credit expansion.
On Thursday, the Dollar index rose to 90.50 but then rolled back to the level of 90.00 amid the exodus of investors into the cash. The forex market well hides capital flight from the stock market, as there are a widespread correction and growth in demand for the most liquid assets – money, making a relative change against each other (the exchange rate) not so pronounced. The fact that the outflow of investors from the stock markets is not only due to increased risks, but their expectations of an increase in the cost of borrowings confirm the lack of demand for precious metals. Gold, one of the main indicators of the level of risks in the market, shows a negative growth, as the cost of hold strategy increases.
Stock markets are likely to still come in line with expectations next week, but the pace of correction is likely to slow. Volatility will also trigger data on GDP in the Euro area and CPI data in the US on Wednesday. Inflation in the US is simply bound to rise under the influence of wage growth in January, but a positive deviation probably will not impress the Dollar, as most of the bullish expectations are already embedded in it.