22.09.2022 – The market is sorting itself out after the Federal Reserve’s interest rate decision. It is clear that the Fed will continue to tighten. We take a look at what this could mean for some assets.
This much in advance: The US dollar remains the big winner. U.S. government bonds are yielding attractive returns, and investors are borrowing large amounts of greenbacks to buy U.S. bonds. Only when the other central banks in the world also drastically turn the interest rate screw, other weakening currencies are likely to catch up again. Here’s EURUSD in a weekly chart.
Quelle: Bernstein Bank GmbH
So to the facts: The Fed has raised the key interest rate for the third time in a row by 0.75 percentage points. The interest rates for overnight loans from banks are now in the corridor of 3 and 3.25 percent.
Higher for longer
There’s probably more to come: Fed Chairman Jerome Powell stressed that the central bank will continue to tighten monetary policy until there is convincing evidence that inflation is easing. Reducing inflation, he said, requires a longer period in which economic growth is below the growth trend and potential of the economy. In addition, he said, the labor market must cool. Powell again announced pain for the economy and consumers. Thus, he held out the prospect of further interest rate steps.
The belief in a turnaround – English: pivot – has now disappeared from the market almost everywhere. The expectation for the upper end of the interest rate corridor is 4.4 percent by the end of 2022. And that brings us to the likely consequences for some assets.
Equities more likely to be short
The matter is bearish for high-tech stocks in particular. First, because borrowing from young companies is becoming more expensive. Second, because interest rates play a role in the most important model for valuing stocks, discounted cash flow. Higher interest rates equal lower valuation.
But cyclicals and defensive stocks are also likely to be hit by the general risk aversion. High inflation is already making consumers cautious – especially if they are afraid of losing their jobs in a recession. Goldman Sachs, for example, just suggested that the Fed could beat the S&P 500 down to 2,900 points.
Unclear situation for gold
The situation with gold is trickier. The price has been trending south despite rising inflation in anticipation of interest rate hikes. In addition, new competition from cryptocurrencies stopped the buying mood. When interest rates rise, that’s usually a stopper for precious metals as well – because if someone gets an attractive coupon on bonds, that’s an argument against gold. Especially since there are still bank fees to pay for the safe deposit box or costs to have your own safe at home.
But many experts fear a recession due to the increased interest rates. And tangible assets not only protect against a decline in purchasing power. But also against deflation – in other words, the total collapse of the economy. When banks collapse and cash is no longer accepted, gold and silver coins are the saving alternative for many.
We hope that we have been able to shed some light on the fog of the market for you with this brief analysis. We stay on the ball for you – Bernstein Bank wishes successful trades and investments!
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