Global equities fell slightly from 14-month highs set last week, as investors awaited U.S. Federal Reserve Chair Jerome Powell’s congressional testimony. Monetary policy speculation continues to influence market dynamics, with the MSCI world stock index moving 0.2% higher.
Notably, Wall Street markets were closed for the Juneteenth holiday, while Europe’s Stoxx 600 index lost 0.5%.
Tech Megacaps Rally in the Face of Rate Expectations:
Investor predictions that the Federal Reserve’s aggressive rate hike campaign will come to an end have fueled confidence and buoyed global stock indices, particularly those dominated by US tech megacaps. When risk appetite is boosted by predictions of looser monetary policy, these tech stocks tend to outperform. Significant investments have come into the tech industry in recent weeks, with experts emphasising the rally’s link to the projected productivity advantages linked with artificial intelligence (AI). However, portfolio managers such as Hawksmoor’s Dan Cartridge warn that if the Fed maintains its aggressive approach, equity values would be rapidly compressed.
Speculation about a rate hike strengthens the pound:
The British pound is now trading around its best level versus the US dollar since April 2022, at $1.2814. This rise is attributable to expectations that the Bank of England (BoE) will raise interest rates to a 15-year high as inflation remains over the BoE’s objective. Money markets currently predict a 25% chance of a 25 basis point (bp) increase and a 25% chance of a 50 bp increase. Two-year British government bond yields have climbed by 8 basis points to 5.01%, exceeding last week’s 15-year peak. Furthermore, the 10-year British gilt yield is 4.462%, indicating an inverted yield curve, which has typically accompanied recessions.
Asian Markets React:
In Asia, Japan’s Nikkei fell 1%, retreating from three-decade highs. Chinese blue chips also fell by 0.9%, while Hong Kong’s Hang Seng index fell by 1.2%. These falls occurred as investors’ hopes for strong economic stimulus from Beijing were shattered by a lack of clear specifics emanating from a recent cabinet meeting. Goldman Sachs has reduced its GDP growth projection for China from 6.0% to 5.4%, joining other big banks in lowering growth expectations for the world’s second-largest economy. The People’s Bank of China, on the other hand, is expected to decrease its benchmark lending prime interest rates in response to a similar reduction in medium-term policy loans.
Currencies and commodities:
The dollar index remained reasonably constant against key rivals on Monday, hovering at 102.33 after falling 1.2% the previous week, the worst weekly decrease in five months. Following a dovish Bank of Japan meeting, the yen fell to a seven-month low of 141.97 per dollar. In contrast, the euro remained strong near a five-week high of $1.092, boosted by the European Central Bank’s hawkish decision to hike interest rates by a quarter point last week. Brent crude oil fell 0.2% to $76.44 per barrel, while gold prices remained unchanged at $1,954.39 per ounce.
Overall, As monetary policy expectations continue to affect markets, investors are looking forward to Jerome Powell’s congressional testimony, which may provide additional insight into the future trajectory of interest rates.
