Tech stocks in danger as FED becomes more hawkish

By: Submissions

Fed becomes even more hawkish

With the exception of the FOMC minutes, due for release later this afternoon, there isn’t an awful lot for investors to focus on. So, it is going to be all about the aftershocks of Tuesday’s reversal in risk appetite, owing in part to a rather hawkish speech by the Fed’s vice-chair. We have already seen some continuation of those moves overnight during Asian hours when bond and equity futures extended their falls.

Tech stocks in danger

Among other things, it is worth keeping a very close eye on US tech stocks as rising yields make government bonds progressively more attractive to yield seekers than the significantly overvalued and low-div-yielding technology sector.

Indeed, the Fed will find it a challenge to keep yields depressed, especially when the inflation outlook continues to deteriorate. We have not seen many signs of price pressures cooling yet. The impact of the Russia-Ukraine conflict and lockdowns in China will only serve to exacerbate the supply issues, which have been the root cause of what has transpired since the pandemic began.

Brainard drops dovish rhetoric

Tuesday’s reversal was undoubtedly because of Lael Brainard’s hawkish remarks. The Fed vice-chair-elect said inflation was “much too high and is subject to upside risks” and suggested the Fed’s balance sheet will be reduced sharply. “The reduction in the balance sheet will contribute to monetary policy tightening over and above the expected increases in the policy rate reflected in market pricing and [the Fed’s quarterly forecasts].”

In response, the markets switched from loving risk to loathing it in an instant. Stocks slumped as yields surged higher, which caused the dollar to rally across the board. Gold was therefore hit by a double whammy of a stronger dollar and rising yields, which more than outweighed any haven demand that was triggered by the stock market selling.

It is not just that Brainard’s comments were hawkish that sent the dollar sharply higher, but more to the point, it is that she is a known dove. So, her openness to more aggressive hikes suggests that even the doves are turning hawkish, while the more-hawkish FOMC members are becoming increasingly more vocal.

Widening yield spread spells trouble for major currencies

With the Fed increasingly becoming hawkish, investors have little choice but to pile in on the dollar. The greenback is likely to continue its impressive form against currencies where the central bank is either having a tough time keeping up pace with the Fed or is by nature more dovish.

The ECB, for example, is torn between surging inflation in the eurozone, which is requiring a contractionary policy response, and the potential for weaker economic performance amid the Ukraine conflict, which requires an expansionary policy stance. This should keep the pressure on the single currency for a while, especially as it has broken below the technically-important 1.10 handle.

The likes of Bank of Japan and Swiss National Bank are nowhere near ready to tighten their respective monetary policies. So the USD/JPY may be able to continue its ascend irrespective of the equity market performance. The USD/CHF hasn’t broken out yet, but with the dollar pushing higher against most other currencies, this pair could follow the footsteps of the USD/JPY in the not-too-distant future.

Russian default risks grow

Meanwhile headlines from Ukraine and Russia won’t go away, rest assured. Moscow has been hit by more sanctions after evidence emerged pointing to a potential massacre of civilians by Russian soldiers. There is a big risk of default by Russia, which, if materialised, could have knock-on effect on the wider financial markets. This is because the US Treasury said it was halting dollar debt payments from Moscow’s accounts at US banks.

If you have any questions please let me know.

Best wishes,

Simona Stankovska

EXANTE

sim@exante.eu

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