Fed Hikes Interest Rates by an Additional 75 bps, Dragging Global Markets

  • Market Overview

Wall Street turned sharply lower on Wednesday, with all three major US indices posting losses of more than 2%, after the Federal Reserve (Fed) hiked interest rates by an additional 75 basis points (bps), dashing any hopes of a policy pivot. Following the announcement, Fed Chair Jerome Powell reiterated that any expectation of a deceleration in the pace of rate hikes is "premature," after which the markets nose-dived. Powell also added that the Fed still has “some ground to cover with interest rates, (given that inflation shows no sign of abating towards the Fed’s 2% target) and that the incoming data since (the) last policy meeting suggests that interest rates will remain higher for longer than once expected.” Bullion trimmed early losses to trade around $1 650 an ounce at 20h00 on Wednesday, as market participants assessed the impact of the latest Federal Open Market Committee (FOMC) decision and sustained hawkish tones by key central banks on the global economic outlook. Although oil rose above $96 per barrel after falling US crude inventories helped ease some concerns about a weakening demand outlook, fears that rising interest rates will eventually pull developed economies into a recession capped gains.

European stocks fell on Wednesday, with household goods counters leading the decline. Reuters reported that Maersk, the world’s largest container shipping firm, “lost over 6% after warning for a demand slowdown following record profits for the third quarter on the back of high ocean freight rates.”

Asian stocks ended the day on the back foot as investors continued to assess the potential impact of unverified claims that the Chinese government is planning to gradually discard strict Covid-19 controls. Meanwhile, the yuan flirted with record lows on Wednesday as lacklustre Chinese manufacturing PMI data further detracted from the economic outlook for the world’s second-largest economy. The currency also fell prey to the Fed’s sustained hawkish tone that led to wider interest rate differentials, as China’s central bank is forced to maintain accommodative monetary policies to aid an already shaky economic recovery.

Although Moody’s upgraded its outlook on Eskom’s debt ratings to positive following Finance Minister Enoch Godongwana’s announcement last week that the government could service a large portion of the power utility’s debt, the FTSE/JSE All Share Index (ALSI) closed 0.40% lower on Wednesday, amid caution ahead of the US interest rate decision, while investors remained on high alert for any other hints on the pace of future rate hikes. Also weighing on sentiment was a breakdown in wage negotiations between public sector workers and the government. The local currency strengthened towards R18.25/USD, amid expectations of a policy pivot by the Fed. All eyes are now on the upcoming South African Reserve Bank (SARB) interest rate decision later this month, with expectations of an additional interest rate hike, given the need to get consumer prices more anchored around the midpoint of the SARB’s target range of between 3% and 6%. SA’s headline consumer inflation currently stands at 7.50%, however, central bank forecasts expect this figure to only return to the 4.50% mid-point of the target range by the end of 2024.

PSG Wealth Daily Investment Update, 3 November 2022

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