Stocks slump: Will the Fed come to the rescue?

The major indices were bouncing off their lows shortly after the open on Wall Street, in what has otherwise been another bearish day for the markets. Investors were looking forward to speeches from several Fed officials as they kept a close eye on the technology sector:


Source: ThinkMarkets and TradingView.com

Following Monday’s big drop on Wall Street, US index futures fell further lower in the first half of today’s session, dragging lower European markets with the FTSE down over 2.5% on the session in one of its biggest falls in months. The losses have been led by the technology sector with the Nasdaq adding to its sharp 2.5% losses from the day before shortly after the opening bell. Haven Japanese yen has responded by gaining ground against the majors, while the euro has also found good support from rising bond yields in Eurozone. The 10-year German bund was yielding -0.166% - although still below zero, it nonetheless represents a sizeable 21% rise from the previous day. US bond yields were also on the ascendancy following Friday’s NFP-inspired drop. Rising yields meant the opportunity cost for holding gold was rising again. As a result, the precious metal sold off a little along with risk assets.

So, what is causing the sell-off?

In short, it is worries over inflation which many believe would accelerate in the months ahead owing to the big gains for commodity prices this year and low interest rate, as well as pent up demand with many countries easing lockdown restrictions. To control inflation, the Fed and other central banks may have to raise borrowing costs, which should mean higher bond yields and that in turn reduces the appeal of low-yielding expensive stocks – plenty of those on Wall Street, in particular the technology sector.
 
Will inflation persist?

But the big unknown risk is whether CPI inflation will be rising in the way many fear and stay high, or will it just be transitory, in the worlds of the Federal Reserve. Until now, many Fed officials have been insisting that tightening policy soon is not going to happen, because inflation is not going to persist for too long above the bank’s 2% average target. However, various measures of inflation have been rising unexpectedly sharply, including house prices, crude oil and many other soft commodities.  Bond market expectations for the pace of consumer price inflation the five-year breakeven rate (which is a measure based on the yield gap between inflation-linked debt and non-inflation securities) surged to the highest level since 2006.
 
Fed to the rescue?
 
FOMC members Williams, Brainard, Daly and Bostic are all due to speak later on. Their comments might help to reduce fears about inflation and policy tightening. But will they fall on deaf ears?
 
 
Here’s what’s in store for the rest of the week:

Wednesday
 

Thursday
 

 
Friday