Global markets had a two day decline on a hawkish Federal Reserve

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Vrasidas Neofytou
Head of Investment Research

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Global markets had a two day decline on a hawkish Federal Reserve
Global equities and cryptocurrencies suffered a sharp two-day sell-off on Friday and Monday as investors digested the hawkish comments from Federal Reserve Chair Jerome Powell about halting inflation in his annual policy speech at the Jackson Hole symposium last Friday.

The central banker said that the policymakers will use all the monetary tools to attack the 41-year-high inflation, which was running at 8,5% in July, and bring it down near Fed’s 2% long-term target, even though the rising interest rates could harm the economic growth, households, and the business activity.

Investors were expecting the central bank to change its aggressive course of rate hikes in the months ahead, which was the primary bullish catalyst of August’s stock rally.

However, Powell’s hawkish tone surprised market participants, triggering a sharp sell-off across the board, with the Dow Jones Average losing nearly 1200 points towards the 32,000 level, or 4% since last Friday, while the interest rate-sensitive tech-heavy Nasdaq Composite tumbled over 5% to the 12,000 critical level, erasing August’s gains.

Nasdaq Composite, Daily chart

Technology has been the worst-performing sector on growing fears that the soaring interest rates, lower consumer confidence, and record-high inflation could trim the future earnings of tech-focused corporates.

At the same time, energy and utilities continue to outperform due to the soaring fuel and electricity prices, which are getting support from the demand/supply imbalance, and the negative impact of the Ukraine war on the energy supply at a time of global demand for energy stands solid despite recession fears.

Meanwhile, Bitcoin briefly dropped below $20,000 on Monday, Ethereum dropped to as low as $1,400, its lowest level in a month, while Solana bottomed to near $30 following the risk aversion sentiment in the market which also coincided with the big sell-off in the stock market.

U.S. dollar and bond yields rally:

Fed’s aggressiveness pushed bond yields and the greenback to multi-year highs on the prospects of higher rates for a more extended period.

The DXY dollar index on Monday hit 109.48, it's highest-level dating back to Sept. 16, 2002, when it reached 109.67, before retreating to 108,50 on Tuesday, with Euro falling to as low as $0,99, and Pound Sterling bottoming to near $1,1650 before bouncing slightly higher today on improved risk sentiment.

The yield on the 2-year U.S. Treasury note jumped to near 3,42% after Jerome Powell’s Jackson Hole remarks, posting a fresh 15-year high, while the yield on the benchmark 10-year Treasury note rose to 3.12%, and the yield on the 30-year Treasury bond climbed up to 3.33%.

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