The Fed chief can “sell” the US central bank’s change of course more or less well to the markets. While Asia and tech stocks are suffering, European stock markets are not being bullied.
An employee walks past the logo of battery manufacturer LG ES (January 23). The South Korean company staged a successful IPO in January.
Although the US Federal Reserve did not surprise the markets, some reacted annoyed. In Asia, the stock exchanges of the export nations Japan and Korea posted heavy losses. The Nikkei-225 slipped 3.1 percent and the Korean Kospi fell 3.5 percent. Above all, technology stocks such as Softbank (-9 percent) and Sony (-6.7 percent) got under the wheels.
The European markets also opened with a “US hangover”. The SMI opened almost 1 percent below the previous day’s level. In the case of the German DAX and the Euros Stoxx 50 for the whole of Europe, the initial setback was even greater. The FTSE-100, on the other hand, was fairly stable. In Switzerland, CS, Zurich Insurance and Swiss Re opened with positive results. Financial stocks are considered to be the beneficiaries of rising interest rates. Bank stocks such as BNP, Banco Bilbao, Banco Santander and ING were also convincing in the Euro Stoxx at the opening of trading. The technology stocks SAP, on the other hand, lost almost 8%.
Only Omikron can prevent interest rate hikes
As so often in the past, gold did not prove to be a safe haven. The listing fell slightly on Thursday after the price had already lost 1.5% the day before. US markets were up for trading on Wednesday but stumbled towards the end after Powell’s speech and ended slightly lower. Only the technology exchange Nasdaq saved a slight plus from the day due to the pleasing figures from Microsoft.
At Wednesday’s open market meeting, the US Federal Reserve outlined a course of action that market participants had anticipated. The first interest rate hike is expected to take place in March. Fed Chairman Jerome Powell named the effects of the Omicron variant as the only reason that could still prevent an interest rate hike in March. A total of four interest rate increases are planned over the course of 2022. The Federal Reserve will end asset purchases as planned in early March.
Unlike previous interest rate cycles
Powell emphasized in his remarks that the coming tightening cycle will be very different from those seen in 2015 and 2018. Firstly, inflation is currently significantly higher. Secondly, the economy would grow much more dynamically and thirdly, the labor market is in far more robust shape. The cycle of rate hikes will also not run at the same pace this time as in 2015: back then, key interest rates were raised about once a quarter, i.e. at every second open market meeting.
In the past few years, the US Federal Reserve has rushed to the stock exchanges’ aid every time they have faltered due to fears of growth and interest rates. The stock market is an important pillar of US consumption and thus a decisive factor for economic growth. This time, however, Powell was unable to offer any prospect of delaying rate hikes or even expanding bond buybacks. Inflation in the USA (to 7% in the meantime) and employment have risen too sharply.
Two percent achievable without tension
The Fed chairman said he wanted to convince investors and US consumers that inflation can fall to 2 percent without financial tensions. One of the decisive factors will be how financing conditions for American companies will change in the coming months. Because of the new “aggressiveness” in the Fed’s rhetoric, credit spreads (the difference in interest rates between government and corporate bonds) have already widened after the press conference.
What is the ECB doing?
The key interest rates will remain in the very low range of 0.0 to 0.25 percent until March. Even if the US Federal Reserve raises interest rates by 0.25 percentage points on March 16, as widely expected, monetary policy will remain expansive – even beyond further interest rate hikes.
Financial market participants will look to Frankfurt next week. There the European Central Bank (ECB) will hold the first monetary policy meeting of the year. The Europeans are likely to refuse to draw level with the US. The ECB prefers to wait and maintain negative rates and accommodative rhetoric. However, this position will become increasingly difficult to maintain as the year progresses.