|Source : CNBC
Markets open higher as Fed Chair signals potential rate hikes and investors await economic data.
European markets began the last trading week of August on an optimistic note, with key indices posting gains as traders digested hints of potential interest rate hikes from the U.S. Federal Reserve. The German DAX 30 surged by 125 points (0.8%), France’s CAC 40 rose by 69 points (0.9%), and the Italian FTSE MIB gained 207 points (0.7%) at the opening bell.
However, trading was halted in the U.K. due to a public holiday. The momentum in the European markets follows a series of discussions among central bankers at the Kansas City Federal Reserve’s annual retreat in Jackson Hole, Wyoming, where the focus centered on tackling persistent inflation in major economies.
Federal Reserve Chair Jerome Powell’s speech during the event garnered the most attention. Powell emphasized that inflation remains elevated and suggested that the Fed is prepared to further increase interest rates to combat high prices. Although he hinted at a degree of flexibility, Powell stressed that the Fed’s commitment to taming inflation remains steadfast.
“Inflation has moved down from its peak, but it remains too high,” Powell stated during his remarks at Jackson Hole. “We are prepared to raise rates further if appropriate, and intend to hold policy at a restrictive level until we are confident that inflation is moving sustainably down toward our objective.”
The decision to potentially raise rates is influenced by inflation trends, with central bankers seeking to ensure that inflation recedes to more manageable levels. This approach comes against a backdrop of declining inflation figures that still remain above target, prompting discussions about how central banks will address potential economic downturns.
The Rise in Yields and its Implications A recent surge in 10-year yields, reaching levels not seen since November 2007, has raised concerns among investors. The unexpected resilience of the U.S. economy and the prospect of persistent inflation forcing the central bank to maintain higher interest rates have contributed to this rise.
Higher interest rates are often viewed unfavorably by stock market participants, as increased rates can dampen enthusiasm for equities due to the reduced attractiveness of future earnings compared to higher-yielding bonds. This dynamic can lead to a shift in investments away from stocks toward bonds.
Willem Sels, Global Chief Investment Officer at HSBC Private Banking and Wealth, highlighted that the 10-year Treasury bond yield presents an attractive opportunity for debt investors. He believes that the current yield levels do not necessarily spell doom for the S&P 500 or other major benchmarks, emphasizing that the real yield has shifted.
Sels mentioned that the market’s pricing reflects the central bank’s commitment to managing rates and controlling inflation, which could have a positive impact on the stability of financial conditions. He suggested that while the influence of higher yields on equity markets may be delayed, it is a factor worth monitoring.
Potential Impacts on Equity Markets While Sels acknowledged that rising yields could eventually affect the equity market, he maintained that the current support for equity markets lies within cyclical sectors of the U.S. economy. He pointed out that the equity market’s response to the situation may change as it continues to evolve, potentially influenced by factors such as credit market dynamics.
As markets move forward, investors are keenly observing developments in the Asia-Pacific region, where stocks began the week with gains. Despite concerns about structural issues in China’s economy, such as debt and demographics, stocks in the region, particularly in mainland China and Hong Kong, showed positive momentum.
In Europe, corporate developments have slowed down after a busy earnings season. Swiss bank Credit Suisse, now a subsidiary of UBS following a government-backed takeover, reported a loss of 3.5 billion Swiss francs ($4 billion) according to insiders cited by the SonntagsZeitung.
The upcoming release of U.S. Labor Department nonfarm payrolls data later in the week is expected to provide insights into the pace of jobs and wage growth, potentially guiding the Federal Reserve’s approach to monetary policy decisions. As markets continue to react to evolving economic indicators and central bank statements, investors remain alert to potential shifts in global financial dynamics.