Fed infuses more pain into equity markets – Stock Market News
These interest rate levels are far above what markets were anticipating before the event, delivering a huge blow to investor sentiment and inflicting severe damage on risky assets. What’s more, the new dot plot does not entail a rate cut in 2023, hinting that tight monetary conditions could stick around for longer than expected. Therefore, persistently high interest rates will most likely weigh on stocks, especially on tech stocks as their discounted cash flows will remain under significant pressure.
Stock markets wobble as yields spike
Another notable development of the latest FOMC meeting was that for the first time Jerome Powell acknowledged that the possibilities of a soft landing are diminishing as a prolonged period of high interest rates could ease conditions in the jobs market and dip economic growth below acceptable levels. Therefore, considering that price stability remains the top priority, the Fed appears ready to cause significant collateral damage, even a recession, in the process of getting inflation under control. In such a scenario, the consequences for the stock market will be devastating.
Following those statements, the US Treasury yields spiked higher with the policy sensitive two-year note hovering at 15-year high levels around 4.13%, while the inversion between the two- and 10-year Treasury yields reached the deepest level in four decades.
Strengthening dollar presents an additional threat
In addition, apart from hurting valuations and making borrowing to fund new investments unattractive, elevated interest rates are likely to extend the dollar’s outperformance. The US dollar index has spiked to fresh 20-year high levels, benefiting both from surging Treasury yields and safe haven flows. This trend will probably deteriorate US firms’ fundamentals, with exports becoming less competitive, weighing on sales in foreign markets.
Moreover, an extended period of tight economic conditions will most likely curtail domestic demand, adding more problems to the US firms’ weakening financial performance, which in turn might translate to drops in share prices.
Where could the Nasdaq bottom?
Nasdaq is a tech-heavy index, thus its performance is more sensitive to interest rate fluctuations relative to the other major US indices. Taking a technical look, we can see that the index has been trading deep into bear territory, but the latest developments could send it even lower.Therefore, for traders who are seeking the next potential support region, the 200-week simple moving average, currently at 11,160 might be a good choice. Even lower, the index could encounter strong support around the 10,590 region, which is the 61.80% Fibonacci retracement of the 6,779-16,759 upleg , extending from the pandemic lows until the all-time high.
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