OPINION
Market Rating Before FOMC MeetingJan 31
Bond Pressure Eases in International Asset Pricing
The most important question is how long the FED, which implemented the strongest monetary tightening in 20 years by increasing the 25 basis point rate hike that began at the second meeting of the year to 50 basis points in May, can sustain these moves.
Starting from June 1, the balance sheet reduction process, which will start with $ 30 billion monthly in treasury papers and $ 17.5 billion in mortgage-backed securities, with $ 47.5 billion, will double after the first 3 months and continue at the level of $ 95 billion. In order not to suffocate and not to create a recession risk, he thinks that he will take a short breath after the June and July meetings.
As a matter of fact, Atlanta Fed President Raphael Bostic pointed out that he may pause the rate hikes to evaluate the effects on inflation and the economy, after the 50 basis points tightening in June and July, accepted by the Federal Open Market Committee (FOMC) members. Here, is the statement of Bank of America, the leading investment bank in the USA, regarding the May FOMC meeting minutes, "It is very likely that the FED will stop tightening in September and leave the benchmark rate in the range of 1.75-2 percent" is very important.
Looking at the market pricing, the indicator of debt instruments in the US 10-years had seen 3.14 percent on May 6, the highest level since November 2018. Up to this point, the 10-year easing process started with the full pricing of the strong tightening in June and July from the FED. On Friday, the lowest levels of 2.70 percent and 1.15 months were observed.
Under this outlook, there was a marked decline in investor stress. The VIX index, which is the most important indicator of risk sensitivity in the US markets, dropped to its lowest level since February 11 with 23.93 points, while SP500, which is in the position of directing global stock markets, recovered up to 4 200 points and erased the losses of 25 days. Of course, there is also the effect of the normalization process that will be passed as of June 1 after the coronavirus closures in China, the most important trading partner of US companies.
At this point, we observe that the dollar, which leads to safe-haven purchases, has difficulty in finding demand with the signs of stability in the financial markets. While the dollar index, which completed the level of 101.50 on Friday, retreated to around 101.20 in the new week, testing its weakest price since April 25, we see that the SP500 index is likely to make a correction by 4 325 points in its hold above 4 100. On the other hand, like the German stock market, placing the DAX40 index above 14 300 is important for the consolidation of the reactions, while we think that the British UK100 index will target 7 785, which is the all-time peak if it exceeds 7 692 points by maintaining its resilient appearance.
