(Bloomberg) – Investors should take a tactful approach when evaluating trading opportunities after an aggressive Federal Reserve hikes interest rates and signals that more will happen.
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This is the view of market participants cautioning against making mega bets after the central bank reported hikes in all six remaining meetings this year to tackle the fastest inflation of the past four decades.
“If they follow what the dot plot suggests, it’s worrying. The risk of political error has increased dramatically today, “said Ron Temple, co-head of multi-asset at Lazard Asset Management in New York.” Markets will need time to assess how multidimensional tightening feels.
Bond markets are already expressing their concern: the spread between 5-year and 30-year Treasuries has narrowed to the flattest level since 2018. With the curve measuring the sense of the market economy, the flattening is partly due to Fed policy bets error weighing on recovery – something that is likely to increase with faster and higher rate hikes.
However, US equities finished higher after Fed Chairman Jerome Powell’s positive comments on the economy, China’s more market-friendly political stance, and possible progress on ceasefire talks between Russia and Ukraine.
Here are some handpicked comments on what will happen to global markets after the Fed:
No equity fund yet
“We continue to advise caution: there are some large companies, with strong moats around their business, that are on sale and we have taken advantage of the selloff, but we are not ready to declare that the fund has arrived and that it is time to get more aggressive on the whole line, ”said Chris Zaccarelli, chief investment officer of the Independent Advisor Alliance. “We are in unprecedented territory in terms of the size of the Fed’s balance sheet, inflationary pressures on the US economy and growing threats to economic growth; and a humble approach to investing is guaranteed, with less conviction in a particular outcome.
Cause for concern
The stock market rally is surprising and “this is not a cause for optimism, it is a cause for concern,” Lazard’s Temple said. It sees three restrictive measures simultaneously: higher interest rates, budget outflows, and higher oil prices such as a US consumer tax.
Interest rate volatility
“It seems to me that the Fed is leaving the financial markets to dictate the path of the fed funds rate,” said Bill Zox, portfolio manager at Brandywine Global Investment Management. “This approach will lead to greater interest rate volatility than if the Fed were to engage in a more two-way interaction with financial markets. If investment grade bonds, high yield bonds and equities continue to decline, we may find out when the Federal Reserve is willing to be more involved in a two-way interaction with financial markets. “
Buy commodity currencies
“History tells us that the US dollar tends to lose height once the Fed begins its tightening cycle,” said Rodrigo Catril, strategist at National Australia Bank Ltd. “Overall there are a lot of uncertainties, but we still think that commodity-related currencies are in a good position to perform this year while the euro could regain its mojo with gusto in the second half of 2022 if we get an ECB preparing to rise alongside an EU spending plan to earn himself from Russia “.
Front loading excursions
“We are less convinced of the underlying strength of both demand and the labor market, so we remain skeptical that they will complete their full hiking program,” wrote Steven Englander, head of gearbox research for the G-10 at Standard. Chartered Plc., In a Note. “The Fed could use upcoming meetings to anticipate hikes as such moves are popular politically and with the public.”
Buy treasury bills
“The attractiveness is high for intermediate and long Treasury notes,” said Makoto Noji, chief currency and Foreign Bond strategist at SMBC Nikko Securities Inc. “The US yield curve has almost fully traded on the dot chart, which means that bond investors expect the US economy to remain resilient to the extent that the Fed can complete all planned rate hikes. “
“The aggressive Fed opens the door to a more aggressive ECB iteration and, as we have seen in past episodes where markets discount negative interest rate policy, the euro soars,” said Stephen Innes, managing partner of SPI Asset Management. “And as ceasefire negotiations have become more and more popular, particularly in the energy market, I think EUR / USD might hold a bid. Lower energy prices are good for the EU economy, hence the euro. “
“There appears to be some commitment to quantitative tightening by the Fed, but there is still some uncertainty about what that means for investors,” said Charlie Ripley, senior market strategist at Allianz Investment Management. “Overall, the Fed’s message is clear that policy rates will be much higher by the end of the year. Now it’s up to the market to become more comfortable with the hawk stance. “
“We are looking for 10 years to hit 2.5% by the end of the year and 2.75% by mid-2023. In addition, bond funds continue to experience outflows, which should also drive interest rates higher. pressure, “wrote TD Securities strategists including Oscar Munoz and Priya Misura. “A restrictive terminal rate and a QT should raise real long-range rates. We remain short on real 10-year rates ”.
Beware of emerging markets
“Emerging market central banks will need to tighten more, keep pace with the Fed and address their internal inflation,” said Rajeev De Mello, global macro portfolio manager at GAMA Asset Management. “I am very concerned about the countries that have so far been reluctant to tighten, those that are most dependent on energy. India is particularly exposed on these two fronts. Yields in many local markets have reached attractive levels and will present investment opportunities when commodity prices stabilize. “
(Adds the US equity move in the fifth paragraph.)
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