Bearish Sentiment Roars Across Equities Ahead of Federal Reserve Rate Decision

June 14, 2022 10:13

Bearish sentiment stemming from recession fears roared across global equity markets ahead of the Federal Reserve’s interest rate decision on June 15.

The S&P was in bear market territory, triggering a sell-off in Asian stock markets at the beginning of the trading week. US stocks were buffeted by inflationary headwinds after US consumer price data for May came in at a new 40-year high of 8.6 percent.

Given the Fed’s hawkish rhetoric, investors and traders naturally concluded that the Federal Reserve is likely to hike its key interest rate guidance by at least 0.5 percent, with the possibility of a rise of 0.75 percent. Although monetary tightening would help control inflation, it would likely mean more expensive credit for businesses and households while lowering consumer spending. Higher interest rates against a background of weaker economic conditions could also lead to the risk of loan defaults.

The USD rose on safe-haven sentiment, while inversely correlated gold spot prices came under downward pressure. For all the talk about a recession in the US, the other side of the rising interest rates coin includes the possibility of improved yields in the bonds and savings markets.

The UK announced its latest employment data today against a set of difficult economic conditions. The ILO Unemployment Rate for the three months ending in April came in at 3.8 percent compared to the previous result of 3.7 percent. The high cost of living and rising interest rates may erode investment in the UK job market at a time when recovery from COVID-19 impacts is vital.

In more trading news, Germany’s ZEW economic sentiment index report is released today. The index is expected to be at the level of minus 27.5 compared to the previous result of minus 34.3. A better-than-expected report may support the EUR, but if the actual results are worse-than-expected, the EUR could come under more pressure.

Finally, today’s US Producer Price Index (PPI) report could set the tone for the USD. The survey is expected to rise to 0.8 percent in May compared to 0.5 percent in April. The report is more closely watched than usual given inflationary conditions in the world’s largest economy.

Quick Tip

What is the US PPI? 

The Producer Price Index (PPI) is a leading indicator of wholesale inflation in prices paid to manufacturers and service providers. ‘Leading’ in this sense doesn’t mean important, it means that the indicator can tell us which direction inflation is heading. Leading indicators can be interpreted for probable future effects and lagging indicators are interpreted as current effects.

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This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks

Sarah Fenwick
Sarah Fenwick Financial Writer, Admirals London

Sarah Fenwick's background is in journalism and mass communications. She has worked as a correspondent covering Swiss Stock Exchange news and written about finance and economics for 15 years.