Central Banks Vs Markets – who will blink first?!
Last week saw numerous interest rate increases across most developed markets. The US increased rates by 0.25% to 4.75% last Wednesday whilst on Thursday European rates went up 0.5% to 3% and in the UK our base rate is now 4% up from 3.5%.
Normally this type of monetary policy action would cause risk assets to sell off but this was the reaction globally intraday post announcement……………………….
US Equities +3%
Europe Equities +2%
UK Equities +1%
Equity markets ‘gapped up’ with big rises of 1-3% after the central bank announcements on the day of the announcement.
The most surprising thing is that the rallies came against a backdrop of central bankers saying fairly unitedly in their press conferences, and I am paraphrasing here:
‘We do not know what the market is thinking but we are going to keep increasing rates as we don’t want to let inflation return’.
Despite this commentary from the rate setters, markets are continuing to price rate cuts in the US this year and in the UK investors are no longer expecting any more rate rises.
Now, these two outcomes cannot coalesce and one of the sides is going to have to blink first!
If central banks stick to what they say they are going to do then investors’ risk appetite could take a hit. It makes for a very interesting dynamic and one we are watching extremely closely.
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