empty
28.09.2022 11:18 PM
Rate hike and its consequences for financial markets

Hello, dear colleagues.

The world is hiding in anticipation of the negative consequences of a rate hike by the Federal Reserve and other central banks. Even people who are far from financial markets know that on Wednesday evening, September 21, an event occurred that could plunge the world economy into shock. However, whether this is really the case, let's figure it out in this article.

I must say right away, I'm not going to belittle the importance of raising rates, but we should understand that the Fed has mastered the art of communication well enough to prepare the markets for the decision of the Open Market Committee. Therefore, investors mainly paid attention to the so-called "economic forecasts", during which it became clear what the Fed plans to do in monetary policy and what the pace of further rate hikes will be.

In turn, traders realized what to expect from the US dollar in the foreseeable future and what will happen in the stock markets in the coming months. In order to understand this, we need to understand the relationship between stocks, the US dollar, rate hikes and bond yields.

By itself, the rate hike does not bring any significant problems for the markets. Stocks can feel great amid tight monetary policy, although, of course, for a number of heavily indebted companies and so-called growth companies, this can really become a problem.

Popular opinion suggests that the cheap liquidity that fueled stock markets may dry up, which will lead to problems for investors who are forced to repay their loans, and an increase in the cost of borrowed funds, in turn, will lead to an outflow of capital from financial markets.

Indeed, a year ago the market looked overheated. With the increase in the cost of mortgage lending, borrowers began to have problems. All this is true, but it is clearly not enough for the markets to begin a steep decline, similar to what we saw last week.

The main thing that we saw on Tuesday, September 27, was a decline in the S&P 500 quotes below the low. Yes, there has not been a close below the low of 3637 yet, but the road down for the index is opening up.

This image is no longer relevant

Figure 1: Stock market, S&P 500 index

From a technical point of view, the index is in a downward trend, below the support level of 3900 and above the level of 3600, which implies a further decline in quotes to the level of 3200. In other words, the index may be at the value of 3200 next week, but in order to overcome this level, it will need a serious driver, such as the collapse of Lehman brothers bank, which can cause a global margin call.

However, a rate hike poses a much greater danger to the American economy than just a decline in stock markets. A rather serious problem for the US budget is the increase in long-term rates on government treasury bonds.

This week, the yield of 10-year US bonds has come close to 4%, and this is already quite a lot, given that the Treasury has to borrow about 6.5 trillion dollars annually: - 4.5 trillion for debt prolongation and another 2 trillion to pay off the state budget deficit. We borrowed money at a low yield, and now we have to extend the loan at high rates. An increase in the rate on long-term bonds by only 1% causes an increase in debt servicing by $ 60-70 billion per year.

Someone may say that the amount of 60 billion is only 1% of the American budget, and they will be right. After all, bond yields continue to rise, and when they exceed the level of 4% and remain above it for a couple of years, this can lead to disastrous consequences for the US economy. Again, they will object to me that this is not a problem, the US will just print money. Yes, it is possible, but the problem is that the Fed prints money, it also receives bonds in return for money, but the Fed is not printing money now and is not going to do this for at least another six months.

Then who in their right mind would buy bonds with a yield of 4% with inflation at 10%? No, of course, there will be those who want to, and if there are not, then they can be asked to buy US bonds, for example, by raising the standards for bank reserves. Ultimately, the problem can be solved by restarting the printing press, and this is where the most important thing begins - the impact of this process on the dollar exchange rate.

It is clear that the key central banks are in direct contact with the Fed. It is also clear that the growth of the dollar and interest on loans leads to a series of defaults of developing countries. It is clear that the euro and dollar exchange rates are manipulated and coordinated. One thing is unclear - is the ruin of the eurozone a priority of the American establishment and does it correspond to its interests? Until now I thought that no, they are not, but after Tuesday's events I began to think that this is exactly the plan.

If the Fed manages to cool down inflation in the next few months, we will soon hear assurances that the policy of tightening rates will end, while the European Central Bank has recently started its rate hike policy. In this regard, I have an assumption, which is nothing more than my fantasy, and it lies in the fact that the dollar and euro are close to the end of their trend. The dollar is close to the end of growth, and the euro is close to the end of decline.

This image is no longer relevant

Fig.2: Foreign exchange market, EUR/USD rate

At this point, I would like to emphasize in particular that the EUR/USD rate has not yet formed a reversal. Moreover, I think it can sink even lower. However, I assume that the movement has entered the last phase of its decline. This scenario may be hindered by the collapse of the stock market in the United States, which, due to increased demand for the dollar, will lead to a further collapse of the euro and other currencies. Therefore, it is necessary for us to monitor the 3600 level in the S&P 500 index. Overcoming this level will open a new page, and then the scenario can develop rapidly - a sharp rise in the dollar, the collapse of the euro, the Fed's rate cut, the collapse of the dollar and the rapid growth of the euro.

However, God forbid you to stand up against the dollar right now and buy any currencies. The market may turn around, but without your deposit. In this context, we need to hope for the best and prepare for the worst.

You may ask - what about oil, inflation and commodity prices? But in any case, these markets have recently been living in their own reality, and we can see double-digit inflation and the dollar exchange rate at historical highs against all currencies, but this will be a completely different story. Be careful and cautious, follow the rules of money management.

Daniel Adler,
Analytical expert of InstaForex
© 2007-2025
选择时间框架
5
分钟
15
分钟
30
分钟
1
小时
4
小时
1
1
通过InstaForex赚取加密货币汇率变动的收益。
下载MetaTrader 4并开启您的第一笔交易。
  • Grand Choice
    Contest by
    InstaForex
    InstaForex always strives to help you
    fulfill your biggest dreams.
    JOIN CONTEST

推荐文章

歐洲央行準備進一步降息

歐洲央行的官員們正準備進一步減息,預計即使特朗普政府放軟立場,美國的關稅政策仍會對經濟造成嚴重且持久的損害。 在上週於國際貨幣基金組織舉行的一系列緊張會議後,大多數歐洲政策制定者都對華盛頓的會議結果感到失望。

Jakub Novak 09:24 2025-04-28 UTC+2

即將到來的一週對市場可能是利好的,但對美元和黃金則可能是利空的(我們預計標準普爾500指數期貨和比特幣的CFD合約將進一步增長)

即將到來的一週將充滿重要的經濟數據發布,可能對市場動態產生顯著影響——但它們真的能做到嗎? 在唐納·川普引發的地緣政治混亂中,對美國和全球經濟未來發展的不確定性愈加明顯,投資者可能會在本週嘗試利用美國、歐元區和中國發布的關鍵數據,以更好地理解近期的預期。 那麼,本週我們應該關注什麼呢?首要的焦點將是美國的就業和通脹數據發布,中美的製造業指標,以及歐元區的消費者通脹數據。

Pati Gani 09:12 2025-04-28 UTC+2

歐元/美元。每週預覽。歐元區通脹、美國GDP、ISM製造業指數、4月份非農就業報告

即將到來的一週經濟日程滿載著重要的發布資訊。照例,新一個月的開始會帶來來自美國和歐元區的重要宏觀經濟報告,這通常會引發歐元/美元的強烈波動。

Irina Manzenko 06:49 2025-04-28 UTC+2

4月28日需要關注什麼?初學者應該注意的基本事件解析

週一沒有安排任何宏觀經濟事件。 如果市場在上週對宏觀經濟數據反應平平,那麼週一也不會有太大期待。

Paolo Greco 05:51 2025-04-28 UTC+2

美元:每週預覽

美國即將迎來一個重要的星期,但對於美元來說,這個星期可能並不重要。本週將發布有關勞動市場、職位空缺、失業率、GDP以及ISM商業活動數據的重大報告。

Chin Zhao 01:05 2025-04-28 UTC+2

英鎊。本週展望

英鎊的表現甚至比歐元還要好。市場不斷找到額外的理由來增加對英鎊的需求,即使歐元保持停滯不前。

Chin Zhao 01:05 2025-04-28 UTC+2

XAU/USD。分析與預測

黃金今天維持著看跌的基調,儘管它已從日內低點略微回升,重新攀升至3300美元之上。 投資者依然寄望美中貿易戰有可能緩和的希望,這支撐了股票市場的正面情緒。

Irina Yanina 12:23 2025-04-25 UTC+2

市場已無路可逃

當唐納德·特朗普和北京仍在試圖弄清楚美中貿易談判是否真正進行時,S&P 500 指數已連續第三天上升,這次得益於美聯儲的鴿派言論。FOMC 成員克里斯多夫·沃勒建議,關稅只會導致暫時的物價上升,美聯儲應該忽視這一點。

Marek Petkovich 11:57 2025-04-25 UTC+2

美元上漲——原因在此

有報導指出,中國政府正在考慮暫停對某些美國進口商品徵收的 125% 關稅後,美元對多種全球貨幣的匯率上升,美國股市也因此走強。此舉似乎是對特朗普總統近期評論的回應,他表示正在考慮降低對中國的部分貿易關稅。

Jakub Novak 11:31 2025-04-25 UTC+2

為何黃金價格可能大幅下跌?(黃金價格可能會持續走低,而NASDAQ 100 指數期貨的差價合約可能上漲)

正式談判的開始可能導致近期金價大幅下跌。 在之前的文章中,我曾建議,由於北京和華盛頓之間就關稅問題展開的談判,之前飆升的金價可能會出現重大修正。

Pati Gani 10:14 2025-04-25 UTC+2
现在无法通话?
提出您的问题,用 在线帮助.
Widget callback
 

Dear visitor,

Your IP address shows that you are currently located in the USA. If you are a resident of the United States, you are prohibited from using the services of InstaFintech Group including online trading, online transfers, deposit/withdrawal of funds, etc.

If you think you are seeing this message by mistake and your location is not the US, kindly proceed to the website. Otherwise, you must leave the website in order to comply with government restrictions.

Why does your IP address show your location as the USA?

  • - you are using a VPN provided by a hosting company based in the United States;
  • - your IP does not have proper WHOIS records;
  • - an error occurred in the WHOIS geolocation database.

Please confirm whether you are a US resident or not by clicking the relevant button below. If you choose the wrong option, being a US resident, you will not be able to open an account with InstaForex anyway.

We are sorry for any inconvenience caused by this message.