World stock markets plunged into gloom on Wednesday after investors questioned the steadfast posture of US stock indices. The wave of correction, the strongest since February 2018, has lashed on American stocks, reflecting the unanimous opinion of investors that Powell has “overdone” with hawkish comments in his last speech.
The US consumer inflation figures, which are scheduled to be released today are likely to add fuel to the speculation that the Fed will dampen the inflationary impulse with aggressive rate hikes.
The lack of buyers in stock markets convinces that demand will shift to defensive assets. The risk aversion is likely to drag on with increasing mistrust towards the main drivers of growth, in particular, towards the position of the American economy which continues to be stable.
On Wall Street, investors are trying to recover from the most significant pullback on the S&P 500 since February, which slashed $850 million off the market cap. Leading the fall was the technology sector. The index fell by 3.29% on Wednesday, the NASDAQ lost 4.08%. The DOW industry index suffered a little less and was down by 2.2%.
The fall prompted Trump to draw away the blame from protectionist policies, condemning the Fed’s rush to raise interest rates. “I don’t like what’s happening with the Fed,” Trump told reporters before a political meeting in Pennsylvania. “I think that that the Fed has gone crazy.”
Indeed, Powell’s remarks last week “that the neutral rate is still far” and “it is possible that the rate will stay some time above the neutral level” stirred investors in the bond markets, causing sharp sell-off and a rise in yield to seven years highs. Against the background of deteriorating outlook for return in stocks (S&P 500 “cap” at 2900 which puts break on capital gains, solid but stalling divided forecasts), the risk/return ratio reached the point where the trade-off between fixed income instrument became and stock became a clear choice. As a result, we can see a massive flow of capital into bonds, which is reflected in the decrease of their YTM. The yield on five-year German bonds fell by 33%, and the US T-bills also rose in price.
The bloated P/E and other metrics of the investment appeal of American stocks have long been a subject of heated debate, but record-high stock repurchase rates have held back pessimism. The reason for the market pullback in my opinion could be Powell pushing gas pedal too much, i.e. the factor of expensive borrowing costs for the firms. The price-earnings and price-sales ratio indicators, which many now be cited as an example and justify an overbought state, stir worrying when there is a slowdown or signals to a slowdown in consumer demand, which the US economy has been successfully refuting. Now, if there are signs of a retreat in Fed stance or reliable signals from the US administration that the Fed may face barriers in shaping its policy, then we can expect a lightning-fast crisis in the market to be successfully stopped.
Now we should focus on the rebound of the S&P 500 from support for the 200-day SMA, which was successfully demonstrated after falling in February:
The currencies of emerging markets today are rising against the dollar as part of a technical correction, but they are likely to go lower because at times of flight from risk they are fundamentally deprived of a stable position. The reaction of gold is also interesting, it seems that traditionally safe haven barely notices the influx of demand. All the same, the real yield is far from the level for substantial interest. If today US inflation goes higher, and US bonds continue to rally (so that the real yield will decrease), then gold may take the part of portfolio from big money, even despite the yuan slack.
Please note that this material is provided for informational purposes only and should not be considered as investment advice. Trading in the financial markets is very risky.