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

比特幣陷入牛市陷阱

底部無力,上方缺乏動能。即使是所謂的「聰明資金」也不急於購買比特幣,理由是多種負面因素交織而成。

Marek Petkovich 15:58 2025-04-01 UTC+2

美元/日元。分析與預測

今天,美元/日元貨幣對在小幅的日內上升走勢中艱難受益,尤其是在市場預期日本央行可能加快加息步伐的情況下。然而,特朗普總統潛在的報復性關稅增加了日本經濟的風險,這可能促使日本央行堅持當前的政策立場。

Irina Yanina 11:37 2025-04-01 UTC+2

美國股市:壞消息已完全反映在股價中

S&P 500 在三年來的季度表現最差。投資者正在將資本從北美轉移至歐洲。

Marek Petkovich 09:13 2025-04-01 UTC+2

四月在歐洲天然氣未來中扮演關鍵角色

歐洲的天然氣行業正進入一個關鍵階段,隨著供暖季節的結束,現正著手補充儲存設施,而這些設施在冬季過後已空了三分之二。 通常,交易商在儲備補充中扮演著核心角色,因為夏季天然氣價格通常較低,使他們能夠通過儲存大量天然氣而獲利,在下一個供暖季節需求再次上升時出售。

Miroslaw Bawulski 13:01 2025-03-31 UTC+2

WTI – 西德克薩斯中級原油。價格缺乏增長的支持

西德州中質(WTI)原油價格正試圖吸引買家,但市場仍然處於不確定狀態。 對特朗普總統激進貿易關稅的擔憂對燃料需求造成壓力,這是限制油價增長的重要因素。

Irina Yanina 12:39 2025-03-31 UTC+2

歐元/美元。分析與預測

在亞洲市場的新一周開始時,歐元/美元匯率試圖吸引買家,但此舉未能成功。 歐元因歐盟與美國之間貿易戰淡化的擔憂而獲得支持。

Irina Yanina 12:35 2025-03-31 UTC+2

美國股市遇到困境

關於互徵關稅的謠言和對消費者信心的再次打擊,引發了今年以來標普500指數的第二大拋售。投資者仍持有大量美國股票,但由於白宮的關稅政策可能導致經濟衰退的威脅,迫使他們出售有毒資產。

Marek Petkovich 10:58 2025-03-31 UTC+2

EUR/USD。你好,四月:歐元區通脹報告、ISM指數及非農就業報告

每個月的第一週對於歐元兌美元的交易者來說是最具信息量的。經濟日曆傳統上包括歐元區通脹增長報告、美國ISM指數以及美國勞動力市場的關鍵數據。

Irina Manzenko 06:28 2025-03-31 UTC+2

GBP/USD 匯率概述 – 3月31日:非農就業數據、特朗普和失業率或將為美元帶來新問題

英鎊/美元貨幣對在週五繼續在高點附近進行橫盤交易。這種橫盤走勢已持續了數週,英鎊在其強勁上漲之後甚至未能進行最小幅度的調整。

Paolo Greco 06:24 2025-03-31 UTC+2

EUR/USD 貨幣對概述 – 3月31日:美元迎來新一週的考驗

歐元/美元貨幣對在週五再度上升。我們可以看到,最近幾週對上升趨勢的修正非常迅速地結束了。

Paolo Greco 06:24 2025-03-31 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.