Almost all major markets are down since the beginning of 2022. US Fed, Bank of England, and RBI (Reserve Bank of India) have already started rate hikes and the market is expecting that the rates will be hiked further.
Due to this the Indian market is also in a downward trend as high inflation is a major concern for all central banks.
On Wednesday, May 4, 2022, at a meeting of the Federal Open Market Committee (FOMC), the Fed chairman announced the decision to raise the interest rate by 50 basis points. But he ensured to the Americans that they would probably not hike the aggressive rate and would not allow an economic downturn.
After which a relief rally was seen in the US market and the S&P 500 closed higher by 2.86% and Nasdaq by 3.07%.
In India too, RBI (Reserve Bank of India) has hiked the benchmark repo rate by 40 basis points (0.40%) on Wednesday, May 4, 2022, after which a sharp correction was also seen in the Indian market.
But on Thursday 5 May 2022, the Bank of England raised its base interest rates by 25 basis points to 1% and the US market went down due to the commentary on the point towards recession in the UK and overall negative sentiments. The S&P 500 was down 3.75% to 4134.79 and the Nasdaq was down 5.23% to close at 12288.85.
The Bank of England said the UK is at risk of hitting a recession and inflation could go above 10%. This decision was also made to prevent the UK’s high inflation, which had reached a 30-year high of 7% in March 2022 and may increase to 10%.
The stock market index Nifty 50 is down around 8.59% in a month. The US Stock Market Index S&P 500 is down 14.84% since January 2022 and the same bearish trend is in the rest of the market as well.
Since March 2021, the annual inflation of the US has been going above 2% and according to the data of March 2022, inflation has reached 8.5%. US inflation was 2.6% in March 2021 as compared to 1.7% in February 2021.
According to experts, high inflation is very damaging to the US economy as it reduces the intrinsic value of the dollar. That is, the purchasing power of the dollar is reduced due to high inflation. To prevent this high inflation, the USA will have to increase its interest rate and reduce the excess liquidity.
Most of the trades are made in US dollars and hence any effect on US currency also affects different currencies of the world. The biggest example of this is the financial crisis of 2007.
After the financial crisis of 2007-08, the Central Bank in the USA kept a very accommodative monetary stance.
The accommodative monetary stance means that they keep the interest rate low, and inject dollars into the economy through open market transactions.
In the USA, in March 2022, the yield curve inversion was seen, in which the yield of 2 years sovereign bond of the US exceeded the yield of their 10-year sovereign bond.
Major universal banks like Deutsche Bank have predicted that interest rate hikes are inevitable in the USA. Apart from this, Goldman Sachs has also announced that there is a 35% chance of a recession in the US in 2022 and 2023.
This article is only for education purpose and the author has his own views and research, so if you invest in these stocks/forex/Virtual Digital Asset then do it at your own risk and do the research yourself before investing.