OPINION
Market Rating Before FOMC MeetingJan 31
Has the Risk of Decline in Asset Prices Ended?
Due to the sanctions implemented by the Western powers and Russia against each other as a result of the invasion of Ukraine, the increase in inflation forecasts resulting from the fluctuations in the commodity prices, and the monetary tightening steps taken by the prominent central banks and led by the US Federal Reserve, we observe that investors continue to pile into the US dollar, making it the primary safe-haven trade. Meanwhile, US futures, cryptocurrencies, and emerging market currencies are about to complete the first 7 months of 2022 under strong selling pressure.
To convey narrower limits; SP500, which is in a position to guide the global stock markets, hit a record level with 4 819 points on January 3rd. With hopes waning to hedge against the risk of war and inflation, it drastically turned to return its earnings. The strong selling wave created by the FED's earlier signal for aggressive rate hikes in bond yields also contributed to the downward momentum here. SP500 dropped to 3 637 points last Friday, erasing the gains of 1.5 years.
Reaching its highest level since April 2011 with 3.5 percent, the purchases that jumped from the US 10 years to the dollar put a lot of pressure on financial assets. Especially in cryptocurrencies, this pressure was more pronounced; Bitcoin hit its lowest level since December 2020 at $ 19 584.
Elsewhere, the euro fell to a 20-year low against the dollar as the European Central Bank (ECB) hesitated to end monetary stimulus. The Bank of Japan (BoJ), still maintaining its policy divergence with the FED, continued unlimited asset purchases, pushing the USDJPY to its highest level since September 1998.
However, the critical June meeting of the FED is over. At the meeting, the Bank increased its federal funds target to the range of 1.50-1.75 percent with a 75 basis point tightening, which is the largest scale in 28 years, above the 50 basis point increase expectations of the markets. Subsequently, the Bank pointed to a further tightening of 175 basis points in its Economic Projections Report, with the expectation that the interest rate will be at the level of 3.4 percent by the end of the year.
Under this outlook, the expectations that the FED will raise interest rates by 75 basis points in at least 1 of the upcoming meetings were almost completely priced in the markets. With the understanding that the FED will provide a healthier economic growth by putting the inflation on the 2 percent rail with the new week, the global bond market has started to loosen; US 10-year treasury yields fell 3.25 percent.
On the other hand, the Central Bank of China (PBoC), which held its monetary policy meeting in June on the first trading day of the week, kept the 1-year LPR rate constant at 3.70 percent. The fact that the policy divergence with the FED did not become clearer contributed to the recovery in investor risk appetite. In the early hours of today, the VIX index, which is the indicator of the US markets, fell below the threshold of 30 points again, upon the messages from the FED members that a soft landing could occur with interest rate hikes.
The hopes arising from the FED's frequent mention of its commitments to ensure price stability and the reaction purchases brought about by the sharp decline in asset prices may be the main reason for their pricing for a short period of time. However, attention should be paid to the neutral interest rate signal of the FED. The correction trend in the markets may be overshadowed by a development that will increase the dollar's neutral rate expectations. In other words, there is still the risk of a sharp decline in asset prices.
