Fundamental Analysis

Equities Correcting Higher After Monday’s Significant Declines

  • The RBA authorized a ninth straight rate increase of 25bps.
  • Investors rushed to buy dollars at the expense of emerging market assets after the US jobs report.
  • Markets expect the Fed’s target rate to increase to above 5.1%.

Equity markets corrected higher after suffering significant losses over the previous 24 hours. The US dollar stayed strong as investors took into account the likelihood that interest rates would continue to rise for an extended period in many developed economies. 

The RBA authorized a ninth straight rate increase, meeting expectations that it would go on with its tightening agenda.

RBA cash rate, quarterly inflation rate (Source: Refinitiv Datastream)
RBA cash rate, quarterly inflation rate (Source: Refinitiv Datastream)

Australia’s cash rate has gone up to 3.35%, the highest in a decade, and the central bank said additional increases should be expected.

Global market strategist for JPMorgan Asset Management Kerry Craig said that central banks and the latest rate hike were driving market sentiment.

Monday saw a decline in global share markets and a strengthening of the dollar due to data suggesting that the US job market is resilient and that interest rates will likely remain higher for longer. Central banks continue to struggle to contain inflation amid comparatively robust economic growth.

Following last Friday’s massive US jobs report for January and a robust recovery in the services sector, investors rushed to buy dollars at the expense of emerging market assets and lower-yielding currencies like the yen.

Investors are caught between the Federal Reserve’s forecast that interest rates will rise and remain over 5% into next year and the market’s expectation that the US central bank will lower rates later this year. There is, therefore, a lot of uncertainty. 

Raphael Bostic, president of the Atlanta Federal Reserve Bank, told Bloomberg News on Monday that the surprisingly strong reading on job growth in January may force the Fed to increase borrowing prices higher than anticipated.

The market currently expect that the Fed’s target rate will increase to above 5.1% in June or July, as previously projected by Fed officials, and then decrease to 4.83% in December. This is more than 30 basis points lower than it was before last week’s positive figures.

Shares of Chinese companies that are listed on the NASDAQ plummeted as Sino-US relations deteriorated over a rumored Chinese spy balloon that the American military shot down over the Atlantic. Heavyweights Inc., Pinduoduo Inc., and Alibaba Group Holding all experienced declines between 0.8% and 1.9%.