(New York and Toronto) North American stock markets reacted sharply lower on Friday following the announcement by the US Federal Reserve (Fed) that plans further interest rate hikes to quell the inflation.
Updated yesterday at 4:09 p.m.
At the end of this calamitous session, the S&P 500 returned to its lowest closing level for a month.
Investors were hoping to hear Jerome Powell give a sign that interest rates were going to slow their upward trend, but that’s not what they heard at all.
The Fed Chairman’s speech got much harsher as he clearly announced the central bank’s intention to end inflation by continuing to hike interest rates sharply for quite a while. Again.
“He has been more explicit than ever before in clearly stating that interest rates will continue to remain high for a longer period in order to fight inflation,” commented the vice-president of AGF Investments, Mike Archibald.
“It has put pressure on various branches of the capital markets, and certainly on equities today,” he added.
“Markets aren’t reacting this way because President Powell’s speech was brutal,” believes Keith Buchanan of Globalt Investments, but rather because the last possibility for a short-term repositioning and easing of monetary policy of the Fed “was ruled out”.
Among the sectors hardest hit by the plunge in the markets, we find technologies, which are more sensitive to the fluctuation of interest rates. The S&P/TSX technology index lost 4.4% while the health care index – which includes cannabis – fell 5.1% at the close of markets.
All sectors of the TSX ended in the red on Friday. In the United States, all but six companies in the benchmark S&P 500 index ended in negative territory.
No “easy way”
In his speech, Jerome Powell admitted that the Fed’s strategy would hurt American homes and businesses, but he argued that there would be even more damage if inflation were allowed to run wild.
“There is clearly no easy way out of this situation,” concedes Mike Archibald, recalling that the severe policies of central banks have never been favorable to the equity market.
I believe that we will go through a period of volatility with the tightening of interest rates.
Mike Archibald, Vice President of AGF Investments
The Canadian dollar was trading at 76.99 cents US compared to 77.30 cents US on Thursday.
On the bond market, the yield on 3-month US Treasury bills, a maturity that is more sensitive to variations in monetary policy than the 10-year rate, reached its highest level in almost 14 years, at 2.82%.
The VIX index, which measures market volatility, jumped more than 17% on Friday.
The Federal Reserve’s continued offensive “drastically decreases the likelihood of a soft landing” for the economy, said Cornerstone Wealth’s Cliff Hodge, “and therefore the chances of an upside and downside scenario.” new highs” in the stock market by the end of the year.
However, “this does not necessarily mean that we are going to go down to the lowest” of 2022, which date from mid-June, continued the analyst, who is counting on markets “agitated, in tight margins” , for the coming months, and advocates adopting a “defensive posture” on equities.
Jerome Powell’s authoritative message eclipsed the series of strong US indicators that had initially carried the market, particularly the slight pullback in US prices in July from the previous month, according to the PCE index released on Friday.
The rate of inflation over one year fell to 6.3% against 6.8% in June.
Another encouraging figure, the consumer confidence index, compiled by the University of Michigan, rose sharply in July, well above expectations. In addition, consumers have revised down their inflation forecasts for the one-year and five-year horizons.
Gold’s value for December contracts fell US$21.60, to US$1,749.80 an ounce, while copper lost less than US$0.05, to US$3.70 an ounce. book.