Risk aversion sentiment pops up as Fed minutes show more rate hikes ahead

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Vrasidas Neofytou
Head of Investment Research

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Risk aversion sentiment pops up as Fed minutes show more rate hikes ahead

Stocks around the world posted sharp losses on Thursday morning as the hawkish outlook from the minutes of the Federal Reserve’s June meeting has currently removed the risk appetite from the markets and increased the negative investor sentiment.

Fed minutes:

Minutes of the Federal Open Market Committee-FOMC’s June meeting were released late Wednesday, indicating further rate hikes and tightening are likely ahead, if at a slower pace than the rapid-fire rate increases that had characterized monetary policy since early 2022.

FOMC members decided against a rate rise in June -after 10 straight rate increases - amid concerns over U.S. economic growth, even though some members disagreed, saying that rates should go higher as inflation remains elevated.

Policymakers paused rate hikes at that meeting on June 13-14 to allow them to have more time to assess the impact of the totaled 5% rate hike - the most aggressive moves since the early 1980s- on the real economy, labor market, and price stability-inflation.

Investors have now increased their expectations for a rate hike in July, with Fed Fund futures prices showing a 90.5% chance the central bank will hike by 25 basis points at July 26 meeting.

A fresh 25 bps rate hike on July 26 is favored as the labor market remains very tight, the economic activity had been stronger than earlier anticipated, and inflation remains higher than Fed’s 2% goal over time.

10-year Treasury yield, Daily chart

On top of that, the 2-year and 10-year U.S. Treasury yields rose to 4.97% and 3.97% respectively on Wednesday, posting their highest since March’s U.S. banking crisis, and the DXY-U.S. dollar index rose across the forex board as investors expect another rate hike in late-July.

Market reaction:

Asian stock markets were hit the most by both the hawkish signals from the Fed and concerns over slowing economic growth in China, with Hong Kong’s Hang Seng index leading losses by almost 3%, followed by Japan’s Nikkei 225 index with over 1% losses, while South Korea’s KOSPI, Australian ASX200, and Taiwan Weighted index shed 0.3%, 1.2%, and 1.3%, respectively. https://www.cnbc.com/2023/07/06/asia-markets.html

Rising interest rates bode poorly for Asian stocks and financial markets, given that they limit liquidity conditions and weigh on foreign capital flows into the region.

Asian declines are tracking some small overnight losses on Wall Street, with the Dow Jones index falling 0.38%, while tech-heavy Nasdaq Composite and S&P 500 dropped 0.2%, respectively.

Market focus is now on NFP-nonfarm payrolls data for June, due on Friday, July 07, for more cues on how the Fed may act in the coming months.

 

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