News – AU – The Fed chief has just disrupted the “Great Rotation” of the stock market


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A second wave of “Great Rotation” was disrupted by cautious comments from US Federal Reserve Board Chairman Jerome Powell

In the last month or so when the “reflation” ???? Trade picked up, technology stocks and the companies that benefited from the pandemic lost ground, while the worst-hit banks and manufacturers saw their share prices rise

It was a repetition of a short-lived rotation late last year away from tech and defensive stocks to cyclicals Companies that rely on economic growth? that was over towards the end of last year

This trend re-emerged late last month and then accelerated last week with the big tech companies the so-called “FAANG” shares (Facebook, Apple, Google’s parent alphabet and Netflix) â ???? shedding 42 percent of their value

The overall market declined about 1 percent over the same period, but this is due to the 28 percent of the U.S. market’s capitalization now exposed to these big tech companies and the rest of the stock market was modest

The big tech companies, trading at nearly 60 times the price / earnings ratio, are extremely sensitive to interest rate movements as they are valued for continued sharp increases in their future cash flows and profits. A relatively small change in the discount rate used to determine the The present value of these cash flows and income affects their valuations

In the past few weeks the interest rate on 10-year US bonds has changed significantly the “risk free” ???? Interest rate on valuation calculations It’s increased from 090 percent at the start of the year to 136 percent, with most of that increase? about 24 basis points of it ???? occur in the last fourteen days

As mentioned earlier, this rise in interest rates and a sudden steepness in bond yield curves around the world, including here in Australia, is due to optimism about the outlook for the economies that are currently being rolled out and another US1 $ 9 in the US Trillion ($ 2 trillion) Pandemic Relief / Stimulus Package Looming

Markets have begun to reckon with the expectation of a revival of inflation to levels not seen since the 2008 financial crisis, which would force the Fed to raise interest rates and its $ 120 billion bond purchase program USD to discontinue

As testimony to the US Senate Banking Committee, the Fed chairman said the US economy is far from its employment and inflation targets and it will take time for significant progress to be made

Even if Powell is wrong, will it take time? several years if the price signals in the bond market are correct? before rates actually start to rise and some of the more stretched asset prices in the financial and real estate markets are adequately stress tested

The Fed would therefore continue to support the economy with its current policy stance for near zero interest rates and its bond purchases

While inflation could be a bit volatile over the next year due to the consolidating economy, that would be a good problem if all of the pressures hadn’t been inflationary for a quarter of a century or more

He also said that inflation dynamics have changed over time, but generally haven’t changed in an instant and attributed the recent surge in bond yields to economic optimism rather than concerns about rising inflation

Even if Jerome Powell is wrong, it could be years before interest rates actually rise and stress test some of the more strained asset prices in the financial and real estate marketsCredit: AP

While there has been a lot of discussion in the markets about the potential of rising interest rates to pierce a number of perceived “bubbles” in the financial markets ???? Bonds, stocks (especially tech stocks), and cryptocurrencies are the most obvious – Powell wasn’t worried, although the Fed’s semi-annual report last week found US corporate leverage was near historical highs and the risks to financial stability were remarkable

There was certainly a link between the Fed’s easy monetary policy and increased asset prices, Powell


“However, I would say if you look at what the markets are seeing, it’s a reopening of the economy with vaccinations, it’s a fiscal stimulus, it is”It’s a very accommodative monetary policy, it’s savings that have accumulated on people’s balance sheets, it’s expectations of much higher corporate profits, so there are many factors that contribute to this”

These comments naturally raise the question of why stock markets hit record highs before there were successful vaccines and as the effects of the pandemic, particularly in the US, intensified

Investors may accept good economic news and use it to rationalize further price gains, but the loose monetary policy of the major central banks after 2008 has decoupled financial markets from their real economies

During the pandemic, the markets were drawn by the central bankers Answers They have been fueled from zero to negative interest rates, liquidity flows, and the belief that the Fed and its colleagues elsewhere will bail them out if things go wrong

The higher the prices of assets, the more persuasive is the threat to financial systems and economies when those prices drop suddenly

The wildcard is the rate of inflation that the Fed could force the hand of if it broke out of the dead zone it is inhabited this century, why the recent surge? ?? even if still at a very low level? when it comes to interest rates has caused such buzz in the markets

It is not so much the absolute level of interest rates as the speed with which they have moved and the yield curve suddenly steepened, despite continued strong central bank interventions In Australia, 10-year bond yields have almost doubled since October – that has unsettled investors

Powell may be right, and maybe it is just optimism about the course of the pandemic and the strength of the impending economic upswing that will change sentiment in the markets, raise bond yields, and fuel the move in the stock markets to these companies to benefit most from an end to the pandemic and an increase in economic activity

Even if he’s wrong, will it take some time? several years if the price signals in the bond market are correct? before rates actually start to rise and some of the more stretched asset prices in the financial and real estate markets are adequately stress tested

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Stephen is one of Australia’s most respected business journalists. Most recently he co-founded and co-edited the Business Spectator website and was co-editor and senior columnist at The Australian

Jerome Powell, Federal Reserve System, Inflation, Chairman of the United States Federal Reserve

News – AU – The Fed chief has just disrupted the stock market ??? Great Rotationâ ????