Bearish Sentiment Roars Across Equities Ahead of Federal Reserve Rate Decision

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The bearish sentiment stemming from recessionary fears roared through global stock markets ahead of the Federal Reserve’s interest rate hike decision on June 15th.

The S&P was in bear market territory, triggering sales in Asian stock markets earlier in the trading week. U.S. equities were hit by inflationary winds after U.S. consumer price data for May came in at a new 40-year high of 8.6 percent.

Given the Fed’s tough rhetoric, investors and traders naturally concluded that the Federal Reserve is likely to raise its key interest rate guidance by at least 0.5 percent, with the possibility of a 0.75 percent increase. While monetary tightening would help control inflation, it would likely mean more expensive credit for businesses and households while reducing consumer spending. Higher interest rates on a background of weaker economic conditions could also lead to the risk of loan defaults.

The USD rose due to a safe haven, while inversely correlated gold spot prices fell below a low. For all the talk of recession in the US, the other side of the rising interest rates includes the possibility of improved yields on the bonds and savings markets.

The UK announced its latest employment data today against a host of difficult economic conditions. ILO’s Unemployment Rate for the three months ending April came in at 3.8 percent compared to the previous result of 3.7 percent. The high cost of living and rising interest rates can erode investment in the UK labor market at a time when recovery from COVID-19 effects is essential.

In more business news, the report on Germany’s ZEW economic sentiment index is released today. The index is expected to be at the level of minus 27.5 compared to the previous result of minus 34.3. A better-than-expected report may support the EUR, but if the actual results are worse than expected, the EUR could be under more pressure.

Finally, today’s report on the U.S. Producer Price Index (PPI) could set the tone for the USD. The survey is expected to rise to 0.8 percent in May compared to 0.5 percent in April. The report is being watched more closely than usual due to inflationary conditions in the world’s largest economy.

Quick Tip

What is the US PPI?

The Producer Price Index (PPI) is a leading indicator of wholesale inflation in prices paid to producers and service providers. ‘Leading’ in this sense does not mean important, it means that the indicator can tell us which direction inflation is going. Main indicators can be interpreted for likely future effects and residual indicators are interpreted as current effects.

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This material does not contain and should not be construed as containing investment advice, investment advice, offer or request for any transactions in financial instruments. Please note that such a business analysis is not a reliable indicator of any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek the advice of independent financial advisors to make sure that you understand the risks.

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