In the USA, the interest rate hike by the Fed by a further 0.25 percentage points triggered much more violent reactions. The leading index Dow Jones and the market-wide S&P 500 each closed 1.6 percent in the red.
“Yesterday’s sell-off on Wall Street left the Dax surprisingly cold,” comments portfolio manager Thomas Altmann from asset manager QC Partners. “Despite a price gain of almost six percent since Monday’s low, there has been little profit-taking so far.”
However, the example of the Nasdaq 100 shows how quickly this can change. The US technology index reached an annual high during Fed Chair Jerome Powell’s press conference following the interest rate decision, but then turned negative and ended trading with a loss of 1.4 percent.
“Many used the high for the year to sell,” says Altmann. “And after the recent recovery, there was only relatively little interest in buying.” In just under two hours, the price collapsed by around 400 points.
There are two reasons for the violent market reactions.
1. The Fed has disappointed market expectations
The losses in the USA were triggered by the fact that the Fed did not meet market expectations. Investors had expected the central bank to signal the end of rate hikes. After all, it was the sharp rise in interest rates that led to the collapse of the Silicon Valley Bank and thus triggered the crisis in the regional banks in the USA.
But the Fed reacted differently than expected. While the 0.25 percentage point rate hike was in line with market expectations, Fed Chairman Powell made it clear that the banking crisis does not automatically mean that monetary authorities will give up the fight against inflation.
According to Michael Heise, chief economist at wealth manager HQ Trust, the Fed is showing a certain degree of composure in the face of the recent financial market turbulence. “Similar to the ECB, the Fed is focusing on separating liquidity policy measures to stabilize the banking system and interest rate policy measures to combat inflation,” explains Heise.
Markets are pricing in at least two rate cuts
However, the Fed’s and the market’s assessments of future interest rate developments differ widely. The latest rate projections by Fed members, the dot plots, show: They expect the federal funds rate to be between 5.00 and 5.25 percent by the end of 2023. That would equate to another rate hike of 0.25 percentage points and no rate cuts.
The Fed Watch tool of the largest futures exchange CME, on the other hand, currently only shows a probability of 0.3 percent for the last December meeting that the key interest rate will actually be at this level. The majority of market participants are anticipating a key interest rate in the range of 4.00 to 4.25 percent or 4.25 to 4.50 percent. That would equate to at least two rate cuts of 0.25 percentage points from current levels.
We have long been of the opinion that the steepest cycle of interest rate hikes in decades will put considerable pressure on interest-rate-sensitive corporate investment demand in the course of this year, triggering a corresponding recession. Andreas Busch, Bantleon economist
Andreas Busch, economist at asset manager Bantleon, assumes that the Fed will have to lower interest rates significantly in the second half of the year at the latest to support the economy. “We have long been of the opinion that the steepest rate hike cycle in decades will put pressure on interest-sensitive investment demand from companies over the course of this year and trigger a recession accordingly,” says Busch. The current uncertainty in the banking sector will tend to accelerate the process.
That Fed and market expectations are so far apart has the potential to move markets further. Because in the long term both cannot be right, one of the parties will have to adjust its expectations – with corresponding reactions from the markets.
2. Banking crisis remains an acute issue
With the further increase in interest rates, a further spread of the current crisis in the US regional banks also remains an acute danger. Many investors had hoped that there would be blanket insurance for bank deposits – this hope was disappointed.
Instead, Fed Chairman Powell described bank deposits as safe. Treasury Secretary Janet Yellen later stated that she did not intend to significantly expand deposit insurance.
Another bank run remains investors’ biggest fear, explains analyst Jochen Stanzl from online broker CMC Markets. In such a case, many customers try to withdraw their deposits at the same time. However, since the banks convert the deposits into long-term loans that they issue, all customers can never be served at the same time. This can lead to bank failure and spread to other institutions.
“The Fed acted as if they were groping in the dark and said it was too early to make a definitive assessment of the banks’ situation,” says Stanzl. “With this strategy, she probably tried to quell further questions from the journalists for the moment.”
Look at the individual values
Banks: The shares of Commerzbank and Deutsche Bank each lose around 0.5 percent. Both titles were recently under pressure because of a possible banking crisis in the USA and Europe.
Vitesco: Shares in the auto supplier fall by more than nine percent. The experts at Jefferies commented that Vitesco’s outlook was somewhat weaker than expected by analysts on average.
SGL Carbon: The graphite specialist only dares to make a cautious forecast. Shares fall about 5 percent.
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