The volatile trading day yesterday on Wall Street, which reached 4% declines on the Nasdaq, ended with a relatively minimal fall of less than one percent – and now opens with declines of up to 0.5%. On the one hand, the market liked the words of Fed Chairman Jerome Powell, Who said it would take time for the American economy to recover. The general economic trend of recent times seems to have calmed the market in terms of low interest rates, credit injections into the repo market and priest and priestess. Although Powell said it would take time for the economy to recover, but the markets are interesting and along with the overall positive reporting season, the market is expected to continue to rise.
“In a number of sectors that have suffered the strongest blow in the epidemic, prices have remained particularly low and sensitive,” Powell said. “Overall and on a 12-month basis, inflation is below 2%, our long-term target. Our economy is very far from our employment and inflation targets, and it is likely to take time for significant progress to be made,” he said, adding that nothing would change until unemployment fell below To 4%.
This was said against the background of the latest statement in 10-year US bond yields, the yield on which has recently risen to over 1.3%, after falling below 0.6% just a few months ago.
“The market is afraid of a change in interest rates and an overly rapid rise in inflation”
“There is a dimension of risk in the market,” he says Ofer Klein, Head of the Economics and Research Division at the Harel Insurance and Finance Group, in an interview with BizPortal. “There are a lot of risks. Every 11 days there is a new mutation. It is not inconceivable that a mutation will soon come that the vaccines will not work against or that it will be more contagious or deadly. So there is a risk that inflation will not be regulated, but there is also a risk of the crisis continuing.”
“Although there were no signs of monetary change, yesterday the market feared that inflation would rise sharply and the Fed would respond with a rise in interest rates. Powell actually managed to calm the market. We saw the declines fall after he spoke.
“We need to understand what the market is afraid of. We are seeing an increase in inflation expectations. We are seeing better data than we expected, as in private consumption. The rise in inflation expectations is because of the world. Shipping is more expensive, production is more expensive, oil is more expensive.
“In the past the Fed talked about there being no change in interest rates for at least two years, now the market is scared again. Powell has repeated his usual mantra. What Powell said is that inflation will only be temporary. So if he is right, even if it rises to 2.5% or 3 “In April-May, but because they are aware that it is temporary, then the Fed will not act,” Klein continued.
“Last November, in my annual forecast, I wrote that US Treasury bond yields would reach 1.4% at the end of the current year, with the entire market expecting a 1% yield. It’s okay that interest rates go up slowly. If it goes up fast this is a problem. The low interest rate is good for the stock market, so it is clear that the expectation of a rise in interest rates will bring down the market.
We also saw that most of the companies that received the blow are the technology companies that need the stock market and zero interest rates, in contrast to which bank shares were not hurt and neither was the Dow Jones hit yesterday. “Stocks like Tesla (TSLA) that are exposed to Bitcoin were also hurt by its decline in value yesterday,” he concluded.
“Ending the epidemic leads to volatility”
The reason for yesterday’s declines is claimed Dudi Reznik from Bank Leumi, the reason is the expected end of the plague. “In recent days we have witnessed relatively turbulent trading in the government bond markets. “The trend began in the United States, where long-term government yields have risen sharply recently, amid fears of a rise in the inflation environment and fears of a faster-than-expected response from the Fed,” said Reznik, Leumi Capital Markets’ interest rate strategist.
“This is a response to the recent decline in morbidity in the United States and the expectation of a return to routine, even if not complete. As a result, 10-year US bond yields climbed to about 1.35% from about 1 percent over the past month. At the same time, in Israel, the shekel yield climbed to 10 years, from 0.8% to 1.1% during this period. .
“The rise in yields led to a decline in stock markets, with an emphasis on the technology sector, amid fears that a rise in yields may herald a closer-than-expected rise in interest rates, something that stock markets fear most of all.
Regarding Powell’s speech, Resnik said that “it is not clear whether Powell’s remarks will calm the stock markets but in the medium to long term. It is clear that the risks of raising interest rates in both the US and the country are very low at the moment. Thus, it seems that this is currently a trigger for the realization of gains in the stock markets that have risen almost continuously since November 2020.
“These are based on fears of rising interest rates, a fear that is probably excessive and eventually, when it disappears, is expected to return the stock markets back to a rising trajectory, even if the trajectory is moderate from the rise in recent months,” he concluded.
“Low interest rates will continue to support rising markets”
The chief economist of Mizrahi Tefahot Bank, Ronen Menachem, Believes that the sharp fluctuations we have seen in recent days in the US stock markets are not accidental at all and affect the Asian and European markets, which are following them with concern.
“We will see more such upheavals in the near future – between and within trading days,” Menachem said. “It should be understood – the sensitivity of the markets, which are close to their peak, to various statements and events – is very high.
“Yesterday, when Jerome Powell said that the road to a recovery in the labor market and a rise in inflation to the desired levels is still a long way off – it seemed to contradict all recent reports of rapid vaccinations, declining morbidity and a near opening of the economy. Did not surprise and the Fed repeats it at every opportunity.
“Still, given the optimism in the markets, these are things that confuse the market and lower its confidence. But, at the same time, Powell says that interest rates will remain low for a long time and even if inflation rises, say, to 3% he will not press the brakes and start raising interest”.
Menachem goes on to say that “I also estimate that the bond purchases made by the Fed will continue at the current rate and will also increase if he detects a” too rapid “increase in yields. This is because such an increase would take away the “control” of the bond market and make the interest rate irrelevant. The stock market understands this.
I would not be surprised if in such a case the Fed does the “Japanese act” and sets a target level for the yield on the US Treasury bond yields for 10 years. In any case, market concerns are understandable, because the Fed and other central banks will have to walk on thin ice: continue With the inflows and contain the rising inflation that will accompany the opening of the economy.
“I estimate that under conditions of sustained zero interest rates for the Fed, which is aimed at keeping interest rates low, the general direction of the stock market will continue to be upward. The level of volatility will, however, be higher than before, as we have seen in the last two days.”
J.P. Morgan: “Rise in Good Yield”
“JP Morgan (JPM) actually says that the rise in bond yields is a good thing.” When you look at the current period in the economic cycle, if you think about the rise in yields or strong growth, or even a little bit of inflation, these are healthy signs, “said G. ‘Valia Wang Market Strategy Bank for CNBC.
“I believe that the global economy is in a cycle of recovery, and the rise in yields certainly reflects this and the optimism about growth,” she continued, emphasizing that in her estimation, quite a bit of this optimism will be reflected in Asian markets.
“If you think about where we are in the growth cycle, the fallout from US fiscal policy will be very significant for Asian exporters, especially in the area of commodities, where sentiment is very positive about starting the economy,” Wang added.