Fears of a hawkish Fed weigh on markets
Stock markets are lower this afternoon as there are fears the Federal Reserve will adopt a more hawkish policy than expected. Yesterday, the Fed’s Lael Brainard, warned about the dangers of high inflation. Traders took that as a sign the Fed could hike rates and reduce its balance sheet sooner than initially thought. A few hours ago, Patrick Harker of the Federal Reserve, commented that he does not see the high inflation going away anytime soon. This also adds to the fears the US central bank will look to step up its monetary tightening plans. This evening the Fed will release the minutes from last month’s meeting – where it hiked interest rates for the first time in more than three years. To an extent, the update will be old news as the event in question took place three weeks ago. Since then, the several US central bankers said they are open to the idea of a 50-basis point hike.
Equities are also feeling the pressure from the war in Ukraine. Governments are looking to move against Russia in terms of additional sanctions, but they are still in the process of figuring out a coordinated approach. The EU is discussing ways to cut back on energy from Russia. Eurozone economies like Germany and Italy are heavily dependent on Russian natural gas, and in turn the DAX and the FTSEMIB are down 2.2% and 2.3% respectively. In respect to the upcoming French Presidential election, Marine Le Pen, the far-right candidate, ticked up in an opinion poll, and that spooked French stocks. There is already major uncertainty in Europe on account of the war in Ukraine, so the possibility of Le Pen taking the top job has rattled traders. The mood in the US is not as downbeat as it is in Europe, as the S&P 500 is off 1.3%, but the tech heavy NASDAQ 100 is down 2.5%.
This morning, the US dollar index hit its highest mark since May 2020 because of hawkish expectations from the Fed. In the past few hours, the greenback has cooled, and it is now basically flat on the day. Earlier, EUR/USD fell to a four-week low, but thanks to a broad rebound in the euro, the currency pair is now up on the session. Despite the large declines seen in stocks, gold is only up fractionally, which seems odd given the overall risk-off mood in the markets.