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Wednesday's FTSE closed in red on worries that the Federal Reserve may raise interest rates further into 2023. With such a significant hike announced last week by the Fed, investors feared it could send global economic growth into recession while reigniting inflation concerns as well.
Markets reacted negatively when St Louis Fed chief James Bullard and Cleveland Fed counterpart Loretta Mester issued warnings of potential rate increases. They stressed that higher borrowing costs must remain in place in order to get inflation back up to the bank's two percent target next year.
On Friday, markets took a hit as the FTSE 100 closed in red - wiping out all gains made during a week-long gain - amid renewed fears over an impending Fed rate hike. Global growth concerns, expectations for further rate increases and continued volatility in the oil market put downward pressure on stocks across Europe.
London shares ended the week down almost 0.19 per cent at 6,001 points, as banks and energy stocks declined. The FTSE 250 also fell, though it remained up on the week.
UK stocks were hit by the decline in oil prices, as Saudi Arabia and Russia struggled for dominance of the world's biggest commodity market. Despite these difficulties, the pound remains a safe haven at around $1.21 - 11% lower than one year prior.
Traders are concerned that the Federal Reserve will keep raising interest rates throughout this year, despite signs that inflation is slowing. Minutes from January's meeting revealed its members remain committed to combatting inflation - which remains well above 2%, as set by the central bank.
Inflationary pressures are also impacting the US labor market, which has shown signs of tightening. This has fueled speculation that the Fed will reduce its rate hikes in 2019 and instead focus on other measures to support the economy such as tax cuts.
However, the minutes of the latest Federal Open Market Committee (FOMC) meeting revealed policymakers were committed to a hawkish approach and expected to raise rates throughout this year and into next. According to AJ Bell investment director Russ Mould, investors have recalibrated their expectations about interest rates; which can only be seen as a good thing.
He noted the "extreme hawkish" tone from central bankers as evidence that they may not yet be ready to stop pushing. Investors had been betting that the Fed would begin loosening monetary conditions sooner than anticipated.
Oanda analyst Craig Erlam notes that despite concerns about a Fed rate hike, the UK economy has shown strength so far this year, with the latest consumer confidence survey showing an uptick in sentiment. This is partly due to government assistance with cuts to fuel and utility bills - worth an additional PS20 billion this year - helping struggling households recover most of the losses caused by the recent oil price shock. The economy is forecasted to expand at about 1% in 2019, while inflation has moderated.
On Wednesday, the FTSE closed in red as markets shrank amid Fed rate hike fears. Its biggest point loss in two months came as minutes from the Federal Reserve's latest meeting indicated officials expect "ongoing increases" to their key lending rate to slow the economy, dimming hopes that cuts might begin earlier this year.
Europe's stock markets plunged again after a dispute between major oil producing countries over production cuts shocked investors. The Dax in Frankfurt and CAC 40 in Paris both lost more than 7%, with Italy's benchmark falling more than 11% while oil prices surged.
Next week, traders are anticipating a large US Fed rate hike; thus far the market has remained uncertain as investors await the outcome of that decision. Furthermore, the Fed will release minutes from its last meeting, which are widely believed to indicate that several officials see an opportunity for further increases in rates.
Therefore, a large hike would likely boost the value of the British pound and increase bond yields; something which the Bank of England has been reluctant to do due to its own monetary policy concerns.
However, there is a silver lining for sterling: higher rates tend to spur corporate profits and this could be beneficial for the UK economy. In the past, major increases by the Bank of England have often been followed by increases in UK GDP.
Higher interest rates make investing and expanding more attractive for companies, while also allowing them to pay out more dividends.
The DAX index is an important barometer of German economic health, as it includes 40 of the largest companies listed on the Frankfurt Stock Exchange. Its weightings are determined by both average trading volume in the index and share prices traded on that exchange.
For decades, the DAX has shown strong long-term trends. Its value has multiplied more than ten times since 1988 and currently sits at an average price/earnings ratio of 22.9, suggesting a high valuation for a DAX share.
The CAC 40 is an index that tracks the top 40 largest and liquid companies listed on Euronext Paris. It has become one of Europe's most popular indices, considered to be a good indication of French economy health.
Stocks have taken a sharp dive this morning due to fears of Fed rate hikes and surging inflation. The FTSE 100 has lost more than two per cent, while the S&P 500 is down 2.8 per cent. This comes after an unprecedented sell-off in Asian markets where the Hang Seng index tumbled 3.7 per cent and Shanghai Stock Exchange shed 5.1 per cent.
Investors have been closely watching the Federal Reserve's recent meetings, where Chair Jay Powell signaled that interest rates might rise sooner than anticipated at their next gathering. This has raised fears about the effect of rising prices on global economic activity.
Inflation is rising faster than anticipated by the Fed and has already affected consumer prices. Furthermore, it has increased wages and raised the likelihood of higher borrowing costs for businesses.
Investors have shifted their focus from anticipating when future rate hikes will occur to worrying about their magnitude. They fear that too many increases could send the world's largest economy into recession and cause ripple effects across other nations.
Analysts anticipate the Fed will raise its benchmark interest rate by a half-percentage point in December, putting it on track to raise rates another four or six times before ending its tightening cycle. While this is in line with what policymakers have indicated they are willing to do, there could be a slowdown from previous increases.
S&P Global's November services PMI showed business activity in France's service sector contracted, marking the first contraction in five months. While this may suggest economic improvement is underway, investors remain wary as it could suggest weak demand growth continues.
The Fed has indicated it will take a measured and patient approach to raising rates, but inflation is unlikely to remain at its current level of around 5.5%. That is the target for the Federal Open Market Committee (FOMC), and markets now project an almost 75% probability that it will raise its benchmark interest rate by one-quarter percentage point at their next policy meeting in December.
The S&P 500 is one of the most closely followed stock indices and a favorite gauge for investors. It measures 500 publicly traded companies that must meet certain criteria, such as market capitalization, liquidity and dividend paying ability.
This week, the S&P 500 declined 2.5% on concerns that the Federal Reserve may be willing to risk a recession in order to lower rates. That concern spread across European markets as well, with Germany's DAX declining 3.3%.
Inflation remains a key concern. The personal consumption expenditures (PCE) price index surged to 4.7% last month, far above the Fed's preferred measure. Furthermore, US consumer spending surged sharply last month amid strong income growth, hindering any potential policy pivot from taking place any time soon.
Markets are worried that if inflation continues to increase, central banks might be tempted to slow their rate hiking cycle down. While this would help keep prices from surging too far up, it could also make the economy less capable of expanding at a healthy rate.
Stocks have struggled to stay strong over the last few months, losing more than 25% of their value this year so far.
Despite recent earnings beats from companies like American Airlines and Tesla, investors remain concerned that the Fed may be ready to raise interest rates sooner than expected. This is because several reports have come out recently which show the economy remains robust.
However, those reports could also add fuel to inflationary pressures. That is why some economists suggest the Fed should wait until there is more evidence of a weakening economy before raising rates again.
Another potential reason for market volatility may be that bonds, which tend to be safer investments than stocks, are paying higher yields. This has made stocks appear expensive and makes it harder for investors to find ways to add them to their portfolios.
Thus, the Federal Reserve appears likely to continue raising interest rates this year and into 2023. This is a concerning outlook, particularly as inflation remains high and the 10-year Treasury yield is close to its highest level since 2007.