Market reaction following this week’s developments

Following last Wednesday’s meeting, the US Federal Reserve (FED) announced that it would speed up the rate at which its significant pandemic related stimulus programme was wound down, with bond purchases now set to end in March rather than June.

Specifically, the FED announced that it would double the pace of its asset tapering program to $30 billion per month. In addition to this, the FED also signalled in its economic outlook that it plans to raise interest rates three times in 2022 (three quarter-point interest-rate increases), reflecting an escalation in efforts to control and limit the elevated levels of inflation.

Notably, the recent price growth was predominantly a result of supply and demand imbalances related to the pandemic and the re-opening of the economy. Indeed, Jerome Powell, further added these issues were accelerated and lasted longer than expected through the multiple and unpredictable waves of the pandemic.

Despite the more relative hawkish interest rate projections communicated to the market, US markets rose in the early hours of trading following the FED’s statement. Indeed, the S&P500 gained 1.63% on Wednesday, with the technology-heavy Nasdaq up 2.15% for the day. Rightly so, through such moves, the FED policymakers indirectly communicated and consider that the US economy is possibly strong enough to handle the Omicron coronavirus variant.

Interestingly, US equities fell on Thursday as shares concerning some of the largest publicly traded technology companies, such as Tesla, Adobe and Qualcomm, slid in value following policy decisions from the European Central Bank, Bank of England and Federal Reserve. But why were tech related companies impacted the most? Notably, technology-oriented stocks are particularly sensitive to interest rates as their value is based on the prospect of future growth, which is diminished by higher borrowing costs. From a valuation perspective, higher interest rates also imply a higher discount rate which ultimately will impact and hinder the underlying value of a company.

Led by declines in the technology sector, the Nasdaq Composite dropped by 2.5%, loosing its gains recorded in the prior trading day and simultaneously recording its worst day since late September. Meanwhile, S&P 500 fell 0.9%.

Moving to Europe, there was more central bank activity in Europe this week. Two of Europe’s senior central banks also took steps to combat surging inflation on Thursday, with the Bank of England (BOE) raising interest rates for the first time since the pandemic commenced, while the European Central Bank (ECB) communicated their intentions to cut its bond purchases in early 2022.

As the general trend towards tightening monetary policy appears to be clear, European indices followed the US markets and closed in negative territory on Thursday. Additionally, the Euro Stoxx 50 index opened circa 1% down on Friday, while CAC 40 in Paris and Germany’s DAX were approximately 0.3% and 0.5% down respectively.

Adding to the negative sentiment, the U.K. recorded a record number of daily coronavirus cases for the second day running, with almost 90,000 infections confirmed on Thursday. Additionally, France has tightened the restrictions on arrivals from the U.K., while Italy has implemented the same strategy for rest of the European countries.

This article was issued by Andrew Fenech, Research Analyst at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.