Bears dominated the financial markets for the second week in a row. Inflation numbers from the previous week paved the way for the interest rate hikes that caused the markets to lose.
Forex
Source: Bloomberg. Click to see full size.
The EUR/USD pair fell to $0.9689, down by approximately 3.35% for the week.
As expected and in reaction to higher-than-expected inflation in August, global policymakers raised rates dramatically to try to contain it and bring it down to more manageable levels. Despite the dangers such choices pose to economic development, the US Federal Reserve (the Fed) increased interest rates by 75bps.
Rising tensions between the European Union (EU) and Russia also dealt another blow to the EUR/USD pair. The war’s intensification exacerbates Europe’s energy problem as winter approaches, increasing the likelihood of a longer and worse recession.
Meanwhile, in the EU, market participants raised their expectations for a 50bps rise from the European Central Bank (ECB) in October, with a 75bps hike possibly on the table.
In other news, GBP/USD has fallen for two successive weeks now. The rate rise decisions by the Fed and the Bank of England highlighted the expanding policy divergence, while the Bank of England (BOE) disappointed the markets by raising interest rates by just 50bps instead of 75bps. This contributed to the pair’s weekly loss of almost 400 pips.
This week will focus on the speeches from ECB President Christine Lagarde and Fed Chairman Jerome Powell. In terms of macroeconomic news, the GDP figures for the United States and the United Kingdom (Q2), as well as the Eurozone CPI, are due soon.
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Commodities
Source: Bloomberg. Click to see full size.
After rallying and remaining resilient for most of the week despite volatile market action, gold suffered hefty losses on Friday, losing nearly 2% on the week.
Gold’s attractiveness has been dampened by rising US Treasury rates, particularly on the interest-rate sensitive short end. Given that the US interest rates have been climbing for months, the current situation is not unique.
As predicted, the Fed raised interest rates by 75bps, offering a lift to US Treasury bond rates and forcing gold prices further down.
Oil fell for the longest period in a row as central banks worldwide stepped up their fight against inflation at the expense of economic development.
Falling for the fourth consecutive week, WTI fell below $80 per barrel on Friday for the first time since January. Concerns about the global economy are causing crude to post its first quarterly loss in more than two years.
Investors will also be watching the Fed speech this week. Because the dollar is highly overbought, any upbeat words about the inflation outlook or comments that may be seen as less hawkish than Fed Chair Powell’s announcement could pave the way for a major dollar drop and help gold recoup some of its losses.
Cryptocurrencies
Source: Bloomberg. Click to see full size.
Cryptocurrency prices fell on Friday after a hectic week that featured an interest rate rise and regulatory measures. The White House presented its cryptocurrency regulatory framework – this includes the US Securities and Exchange Commission (SEC) claiming authority over Ethereum and the Internal Revenue Service now pursuing crypto tax evaders.
After rising above $19,400 earlier in the day, Bitcoin fell to roughly $18,800 after the market closed on Friday. Meanwhile, Ethereum dropped below $1,300, losing nearly 12% in the previous seven days. One of the major factors that contributed to this drop was the Ethereum switch to a proof-of-stake network, which may lead to future regulations on ETH.
In other news, Warren Buffett has criticised cryptocurrencies, claiming they have no fundamental value. This criticism has kept Berkshire Hathaway (BRKB) away from digital banking, crypto businesses, and non-traditional financial firms. However, new SEC filings by Buffett indicate that he may be opening up to some of these more risky assets, at least indirectly.
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US stock markets
|
Name of the index |
Friday’s close |
*Net change |
*Net change (%) |
|
Dow Jones Industrial Avg (Wall Street 30) |
29,590.41 |
-1,232.01 |
-4.00% |
|
Nasdaq (US Tech 100) |
11,311.24 |
-550.14 |
-4.64% |
|
S&P 500 (US 500) |
3,693.23 |
-180.10 |
-4.65% |
Source: Bloomberg
*Net change and net change (%) are based on the weekly closing price change from Friday to Friday.
Last week, the Fed was fully in control of the markets, with the stock market reeling and interest rates rising as investors absorbed the likelihood of more aggressive rate rises ahead. As part of the Fed’s effort to bring down excessive inflation, it raised its policy rate by 75bps and boosted its forecast for future rises.
The 10-year US Treasury bond yield increased for the ninth week in a row, reaching roughly 3.69% on Friday up from around 3.45% from the previous week.
Dow Jones was down by 4%, Nasdaq fell by 4.64%, and S&P 500 was down by 4.65%.
Stocks rose more than around 17% from mid-June to mid-August, owing to a growing consensus belief that the Fed would refrain from raising interest rates in the short term. While the CPI did drop to 8.3% year-on-year in August, the report disappointed on a month-over-month basis, with inflation rising 0.1%, presumably supporting the Fed’s more hawkish language last week.
Concerns about rising interest rates and the greater likelihood of a recession drove equities into a bear market in June, and the resurgence of those concerns has pushed stocks back to midsummer lows.
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