The mood in equity markets has improved since last week as we have witnessed a rebound in European and US stocks. Last Wednesday, the Federal Reserve suggested it was going to hike interest rates twice in 2023 and that caused a stir in the markets. The volatility picked up on Friday when the Fed’s James Bullard reinforced the hawkish outlook as he predicts that rates will increase next year. Even though equity markets incurred painful losses in Asia overnight, there has been a rebound in sentiment today.
Dealers are content to snap up relatively cheap stocks. The update from the US central bank last week upset the applecart but at some point, there was always going to be a change in language as interest rates cannot remain at ultra-low levels forever. Now that the Fed has made it clear we could be in for rate hikes in the next two years, perhaps traders will get used to the notion that monetary policy will eventually change. A few weeks ago, Janet Yellen, the Treasury Secretary, announced that higher interest rates will be good for the economy, provided they are hiked at a time when the economy can withstand the change in policy.
It is possible the sell off in stocks that we saw recently could be reversed in the next few sessions as dealers accept the view that rates might be increased within the next 24 months. The tech-focused NASDAQ 100 is the outperformer of the US indies as it is only 0.7% from its recent all-time high, while the Dow Jones is yet to retest the high seen in early June. Germany’s DAX is up almost 1% today but it is still 1% shy of the record that was registered last week.
GBP/USD and EUR/USD have rebounded today as there has been a broad pullback in the US dollar index. The dollar hit a two-month high in the wake of the Fed and it was given an extra lift by Mr Bullard’s comments. Today, the greenback has slipped as dealers banked their profits on the recent rally. Gold and silver are higher thanks to the weakness in the dollar, the inverse relationship between the assets and the currency continues to be strong. At the end of last week, gold dropped to a seven-week low, so today’s move is likely to also be a function of bargain hunting. Industrial metals, like copper, platinum and palladium have recovered too. Oil is enjoying a rally as fears surrounding the Fed’s update have faded. Bank of America holds a bullish medium-term view on oil as they predict that Brent crude will hit $100 next year.