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Digital currency markets, precious metals and stocks fell another leg on Monday after the fall markets last Tuesday. Last week’s drop was one of the worst weeks in more than three months, as market strategists believe a significant Fed rate hike is coming this week. Bank of America’s analysts led by Savita Subramanian believe that the US central bank “has more work to do” and that an aggressive central bank could be “unfortunate for stocks that have benefited from low interest rates and disinflation”.
A hawkish Fed could be repellent or kryptonite for assets that benefited from easier monetary policy and stimulus, Bank of America market strategists led by Savita Subramanian said in a note last weekend. Global assets got off to a tough start on Monday as all four major Wall Street stock indexes started the day (09:30) lower after a horrendous week of trading activity last week. By 3:00 pm (ET), benchmark stocks saw a slight uptick, reflecting extreme market volatility and uncertainty.
Subramanian and his team predict that the S&P 500 will lose another 8% this year, and he further emphasized that “the summer rally is over.” On Monday, digital currency markets fell by 1.61% in the last 24 hours, and the crypto economy is now just over $900 billion at $933.17 billion. Bitcoin (BTC) has lost 1.67% and ethereum (ETH) has traded down 1.79% against the US dollar in the last 24 hours.
Precious metals such as gold and silver also lost on Monday, as gold fell 0.12% and silver fell 0.74% against the dollar. Bitcoin markets have been extremely correlated with US stocks, but some BTC market analysts believe bitcoin is a completely different animal.
“[Bitcoin] and the S&P 500 are correlated,” pseudonymous analyst Plan B tweeted on Monday. “In the same period that the S&P increased from ~$1K to ~$4K, [bitcoin] jumped from ~$10 to ~$20K. 4x versus 2000x… completely different worlds. Short-term movements are noise, long-term trends are the signal.”
Meanwhile, economists and analysts suspect the US Federal Reserve will raise the target federal funds rate by 75 basis points this week. Bank of America’s Subramanian detailed that “the Fed has more work to do” and lessons from more than four decades ago can tell us a lot about fighting inflation.
“A hawkish Fed can be anathema to stocks that have benefited from low interest rates and disinflation (i.e., most of the S&P 500), but experience from the 1970s tells us that premature easing can lead to another wave of inflation—and that short-term market volatility may be a smaller price to pay,” explains the Bank of America strategist’s note. Subramanian’s opinion follows the report Bank of America economists revealed in mid-July.
If the Fed doesn’t watch out, something will break. pic.twitter.com/inTtO7CZaP
— Sven Henrich (@NorthmanTrader) 16 September 2022
At the time, the bank’s economists said it previously expected a “growth recession,” but the summer forecast suggested a “mild recession in the U.S. economy this year.” Market analyst Sven Henrich reported on Monday cited Fed Chairman Jerome Powell’s statement during a press conference last June, when Powell said: “Obviously, today’s increase of 75 basis points (bps) is unusually large, and I do not expect moves of this magnitude to be common.” Henrich then mocked the Fed chair by noting that the central bank is continuing to implement its third consecutive 75 bps rate hike.
While nearly every asset class under the sun shows a strong correlation with inflationary pressures and the Fed’s monetary policy, the US dollar has continued to soar against other fiat currencies. The US Dollar Currency Index (DYX) tapped 109.756 on Monday afternoon (ET), and the euro has met parity with the dollar again. A single Japanese yen is equivalent to $0.0070 per yen, and 10-year US Treasuries hit an 11-year high of 3.518% on September 19.
What do you think of the Bank of America market strategist’s opinion on an aggressive Fed and the S&P 500 losing another 8% by the end of the year? Let us know what you think about this topic in the comments section below.
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