16.12.2022 – Feeding frenzy for the bears: Several central banks have raised interest rates. And they did so in the midst of a recession that can no longer be averted. Signals of an end to the tightening were nowhere to be seen. Then there is the issue of option expiration dates. We take a look at the background.
It’s all downhill – especially the interest rate-sensitive high-tech stocks got a big nose-dive. Here the Nasdaq 100 in the hourly chart. The pretty peak three days ago on the inflation figures turned out to be a bull trap.
Source: Bernstein Bank GmbH
The conclusion of the past few days: disappointed hopes among the bulls. Not only the Federal Reserve has raised interest rates. But also the European Central Bank (ECB), the Bank of England and the Swiss National Bank. So there’s a lot of capital being sucked out of the market.
Misled
A special factor in the sell-off is the disappointment with the Fed: After the lower November inflation rate in the U.S. of 7.1 percent (after 9.1 percent in June), many stock market players had expected that the central bank might send out a signal as to when its interest rate hikes would come to an end. Particularly as commodity prices have recently fallen sharply again. But nothing came. After Fed Chairman Jerome Powell’s statement, dejection prevailed. As expected, the Fed also raised interest rates by 50 basis points. However, there was no indication of an end to the tightening.
Contradictions of the Fed
U.S. Chief Economist Ellen Zentner of Morgan Stanley judged that the Fed’s message was “inconsistent.” After all, “The December FOMC decision included the delivery of a 50bp hike to a range of 4.25-4.50%, and a decidedly hawkish Summary of Economic Projections (SEP). The Committee has been frustrated by the lack of progress toward its goals and now sees the need for even more restrictive policy in order to sufficiently weaken the economy, labor market, and inflation.”
Further, the Fed had refrained from retracting the “ongoing increases” statement from earlier meetings. And suddenly the situation had become enormously “hawkish” again. The expert said: “The Committee still sees “ongoing increases” as appropriate, though comments from Chair Powell appeared open to another step down in pace to 25bp at the February meeting – in line with our expectation.” Fund company DWS judged that this would indicate a normalization of monetary policy only for 2024 and beyond.
QT in Euroland and options
The ECB’s announcement that it would reduce its bond holdings from March also caused prices to fall on the bond market. This means that maturing bonds will no longer be replaced, so the ECB is withdrawing liquidity from the market. ECB President Christine Lagarde also raised eyebrows. According to her, interest rates would have to continue to rise “significantly” in order to bring inflation rates back close to the targeted 2 percent. The Landesbank Baden-Württemberg (LBBW) commented that this would probably mean at least two percent.
Landesbank Baden-Württemberg (LBBW) commented that this would probably mean at least two more interest rate steps of 50 basis points each.
Our conclusion: Anyone expecting signals of a looser monetary policy was disappointed. And then there is the options market. According to Bloomberg, options worth about $4 trillion expire this Friday. That could exacerbate turbulence in the stock market. Whether long or short – Bernstein Bank wishes successful trades and investments!
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