1. The Market Suffers from Pandemic Fever All Over Again
- Wall Street suffered its worst sell-off since the early days of the pandemic as investors predict more aggressive action from the U.S. Federal Reserve.
- It would be a brave investor to double down on equities at the current juncture, especially given that the Fed’s response to the slowing pace of price increases is as yet unclear.
If flooding the markets with liquidity was the elixir that rescued the global economy during the depths of the pandemic-induced crash in asset prices, then the withdrawal of that medicine is proving to be a bitter experience.
After official U.S. Consumer Price Index data increased unexpectedly in August with CPI prices up 0.1% from the previous month, Wall Street suffered its worst sell-off since the early days of the pandemic as investors predict more aggressive action from the U.S. Federal Reserve.
CPI came in at 8.3%, down from 8.5% in July, but higher than the 8.1% economists had predicted.
According to data from CME Group, investors on Tuesday priced in a 1-in-3 chance that the Fed would raise rates by a full percentage point this month rather than a 0.75% increase that remains the consensus expectation.
The benchmark S&P 500 stock index tumbled 4.3%, its worst day since June 2020 with 99% of companies sliding in value.
The Nasdaq Composite fell 5.2% as technology groups seen as most exposed to higher rates bore the brunt of selling.
Nearly 2,000 stocks trading on the New York Stock Exchange fell in value in tandem, a phenomenon normally seen at times of market stress.
Facebook owner Meta (-9.37%) and chipmaker Nvidia (-9.47%) were among the biggest losers, both down 9%, while Amazon (-7.06%) shed 7%.
Apple (-5.87%) and Microsoft (-5.50%) experienced their biggest daily losses since September 2020 with market valuations down US$154 billion and US$109 billion respectively.
Asian stocks also followed Wall Street lower on Wednesday, with Hong Kong’s benchmark Hang Seng index falling 2% and Japan’s Topix index down 1.7%.
The yield on short-dated government debt that tracks interest rate expectations hit its highest level in almost 15 years as investors increased their bets that the Fed will need to act more aggressively to combat rising prices.
Following the report, investors in the futures market bet that the Fed’s benchmark interest rate would stand at 4.17% by year-end, versus expectations of 3.86% before the report.
The prospect of higher rates prompted a jump in the dollar, leaving it up 1.4 per cent against a basket of six peers.
To be fair, it’s as yet unclear whether the panic in the markets is warranted.
After all, the pace of inflation appears to be plateauing, with CPI at 8.3%, down from 8.5% in July and well off the 9.1% in June, but investors remain concerned that the low hanging fruit have all been plucked and the bitter medicine of higher rates can be avoided.
It would be a brave investor to double down on equities at the current juncture, especially given that the Fed’s response to the slowing pace of price increases is as yet unclear.