Source: Wind Information
The global tightening cycle has made investment more difficult. Now the trend of major categories in the market is more and more breaking away from the past model. For example, the US dollar and commodities are rising together, and US stocks and US bonds are falling together. It is impossible to learn from past investment experience. Start.
On April 19 (Tuesday), the U.S. dollar index rose above the 101 mark for the first time since March 2020. Earlier, St. Louis Fed President Bullard said at an online meeting of the Council on Foreign Relations that “the possibility of a 75 basis point rate hike is not ruled out.”
Bullard said the Fed raised its target for the federal funds rate to around 3.5% by the end of the year to help contain inflation, which is currently at a 40-year high. For recession talk, Bullard said it was too early to talk about a recession because the Fed has only raised interest rates once so far. He expects the U.S. economy to grow at a healthy pace in 2022 and 2023, ahead of long-term trends, and expects the unemployment rate to fall below 3%. Bullard is a voting member of the Federal Open Market Committee (FOMC).
A sharp interest rate hike by the Federal Reserve will inevitably lead to a return of the US dollar, thereby raising the US dollar index. In the past, the trend of the U.S. dollar and commodities was a strange relationship, and a strong U.S. dollar would suppress the performance of the commodity side, but this time we have not seen this phenomenon.
Commodities, whether it is energy or food, are all skyrocketing. Brent oil has risen by more than 45% since the beginning of the year, gold is approaching the $2,000/oz mark, U.S. natural gas futures in May rose above $8, a new high in more than 13 years since September 2008, and U.S. corn futures rose 2.8%, breaking through $8 per bushel The U.S. dollar hit a ten-year high since September 2012…
Since June 2021, the resonant rally of the US dollar index and commodities has continued for nearly 10 months. The main reason is that the apparent recovery of the global economy in 2021 will drive the demand for commodities to rise, and the return of funds to the United States under the expectation of US dollar interest rate hikes will push up the US dollar index. Since February 2022, the intensified geopolitical risks, the Fed’s interest rate hike and sanctions against Russia have accelerated the further resonance of the US dollar index and commodities.
In the short term, interest rate hike expectations and risk aversion support the dollar to continue to rise. In the next one to two quarters, as the market expects the Fed to raise interest rates, the US dollar index still has room to continue to rise. The global epidemic has not yet completely ended and the conflict between Russia and Ukraine has reached a stalemate, and the situation of high commodity prices is difficult to change in the short term.
The Fed’s shrinking balance sheet means a surge in Treasury supply, and falling prices have pushed Treasury yields higher. Since the beginning of March, the market expects interest rates to rise, and borrowing costs have risen sharply. This trend is expected to accelerate further after the start of the reduction of the table. Under the current process of shrinking the balance sheet, facing an environment of increased volatility and a lot of uncertainty, the market needs to absorb a large amount of government bonds, and the liquidity of the US Treasury bond market has deteriorated to the worst since the epidemic. The Barclays U.S. Aggregate Bond Yield Index has fallen 8.03% this year.
In terms of U.S. stocks, “Don’t fight the Fed” is a good word, and it is difficult for stock indexes to perform well in the U.S. interest rate hike cycle. According to CME Group’s “FedWatch”, the probability of the Fed raising interest rates by 25 basis points by May is 9.0%, and the probability of raising interest rates by 50 basis points is 91.0%.
Since the beginning of this year, the three major U.S. stock indexes have still had negative returns, of which the Nasdaq has fallen the most, down nearly 15%. On April 12, “New Debt King” Jeffrey Gundlach said that the recent stock market pattern is very similar to that in 1999, warning everyone that “the economic tragedy of the US stock market crash may repeat itself”!
Inflation seems to be the source of all this, and when inflation peaks, the market is likely to return to a “normal” trend.
Editor/Viola
This article is reprinted from: https://news.futunn.com/post/14672192?src=3&report_type=market&report_id=203460&futusource=news_headline_list
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