Financial basis

‘A violent unwinding of overcrowded positions’: Dow plunges 1,000 points as investors brace for more volatility and uncertainty

Here we go again.

Markets fell on Thursday, with the Dow Jones Industrial Average DJIA,
-3.02%,
the S&P 500 SPX,
-3.40%
and the Nasdaq Composite COMP,
-4.93%
all losing Wednesday’s gains.

On Wednesday, markets rallied after the Federal Reserve raised the benchmark interest rate by 50 basis points. Fed Chairman Jerome Powell said the central bank was unlikely to raise its benchmark interest rate by 75 basis points at its next meeting, while promising back-to-back rate hikes of 50 basis points.

The hawkish tone of the Federal Open Market Committee shook the markets. Wednesday’s rate hike was the most aggressive monetary policy tightening in a single meeting since 2000.

Michael Shaoul, CEO of Marketfield Asset Management, wrote in a research note: “There was nothing dovish about the FOMC message. Even so, the delivery of the certainty of a 50 basis point rise acted as a catalyst for a violent unwinding of overcrowded positions.

“The delivery of the certainty of a 50 basis point rise acted as a catalyst for a violent unwinding of overcrowded positions.”


— Michael Shaul, CEO of Marketfield Asset Management

Investors are worried about the Fed’s delicate balancing act: raising interest rates to fight inflation without pushing the US economy into recession. When the Fed raises rates, it becomes harder for millions of consumers to borrow. When consumers feel confident about borrowing, they are more likely to spend.

Example: The interest rate on a 30-year fixed rate mortgage averaged 5.27% for the week ending May 5, according to data published by Freddie Mac FMCC,
+0.73%
Thursday. That’s an increase of 17 basis points from the previous week – one basis point equals one hundredth of a percentage point, or 1% of 1%.

This represents the highest point in the benchmark mortgage product in 30 years since August 2009. This, according to some analysts, marks the end of the housing boom linked to the pandemic.

“The consequences we risk from tightening policies are a potential recession, potential job and wage losses, and clearly tighter financial conditions that will weigh on virtually all financial markets,” wrote Chief Investment Officer Rick Rieder. global fixed income securities at Blackrock, in a note. Wednesday.

“Russia’s invasion of Ukraine is causing enormous human and economic hardship. The implications for the US economy are highly uncertain.


– FOMC statement issued Wednesday afternoon

“The Committee is very mindful of inflation risks,” the FOMC said in an updated statement Wednesday afternoon. “The Committee seeks to achieve a maximum employment and inflation rate of 2% over the long term.”

Then there is Russia’s war in Ukraine. “Russia’s invasion of Ukraine is causing enormous human and economic hardship. The implications for the US economy are highly uncertain,” the FOMC added. “The invasion and related events are creating additional upward pressure on inflation and are likely to weigh on economic activity.”

And although people are living their normal or near normal lives, COVID-19 has not gone away and the world is still learning to live with the virus. “In addition, COVID-related lockdowns in China are likely to exacerbate supply chain disruptions,” the FOMC statement warned on Wednesday.

On Thursday, the World Health Organization said new estimates reveal that the total number of deaths directly or indirectly associated with the COVID-19 pandemic between January 1, 2020 and December 31, 2021 now stands at 15 million. of people. Johns Hopkins University estimate of COVID-related deaths over the same period as of Thursday: 6.24 million.

There were, however, some hints of optimism on Thursday. “Given our base case scenario of moderating growth and inflation, we believe equity markets will end the year higher than current levels,” wrote Mark Haefele, chief investment officer at UBS Global Wealth. Management. “We continue to favor sectors of the market that should outperform in an environment of high inflation, rising rates and high volatility.”