US Futures and Stocks Decline As Cost of Federal Reserve Outlook

On Monday, European stock markets followed US share futures lower as investor confidence was weighed down by concerns about the effect of the Federal Reserve’s commitment to tighter monetary settings and their potential impact on economic development.

Futures contracts for the S&P 500 and the NASDAQ 100 both experienced losses of more than one percent. The yield on the 10-year Treasury note hardly moved, while the yield on the two-year note increased by around five basis points. This widened the yield-curve inversion, which is a leading indicator of a forthcoming economic downturn. The spot index for the dollar reached its highest level in five weeks.

The Stoxx Europe 600 index fell to its lowest level in more than three weeks, with manufacturers of automobiles and the technology sector leading the charge in a general downward trend. The Asia-Pacific share index maintained its downward trend for a third consecutive day, with losses being visible in the majority of the region’s major countries. However, there were modest gains in China, where property developers benefited from a move by banks to reduce lending rates.

The Federal Reserve has repeatedly warned that interest rates are going to go higher, which has stoked concerns about a recession in the United States. However, a rebound in global share prices from the bear-market lows reached in June is beginning to fizzle out. In addition, investors are beginning to become aware of the imminent acceleration of the Federal Reserve’s balance-sheet reduction. Next month, so-called quantitative tightening will move into high gear, which will add to the pressure already being exerted on riskier assets that have benefited from plentiful liquidity.

The most recent findings from the MLIV Pulse survey indicate that equities and bonds are likely to experience further losses, despite the fact that inflation has probably reached its maximum level. Approximately 68% of respondents believe that the most unstable period of price pressures in decades will erode corporate margins and send equities lower.

“It is expected that central bankers, particularly Fed Chair Jerome Powell, will remain hawkish in dealing with inflation,” the head of investment strategy at AMP Services Ltd., Shane Oliver, wrote in a report. “However, a bit of caution will sneak in given the looming economic slump,”

This week’s focus should be on the symposium being held by the Federal Reserve in Jackson Hole, Wyoming. The recent increase in stock prices has resulted in looser financial conditions, which makes it more difficult to combat inflation.

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The symposium provides Powell with a forum from which to re-calibrate the expectations of the market for a shift toward more gradual rate hikes. The latter bets contributed to propel the current equities bounce, but they are susceptible to the risk of consistently elevated price pressures even while economic growth stutters. This is because they are placed on assets that are already experiencing price pressures.

During this time, natural gas prices in Europe continued their upward trend as concerns reappeared about a prolonged suspension in supply through a key pipeline, which would put an already suffering economy in jeopardy.

As a direct result of a decision made by China’s central bank the previous week to reduce a key policy rate, prime interest rates for loans with terms of one year and five years were reduced by Chinese banks on Monday.

The expectation of weaker demand from China is a drag on the price of oil, which dropped below $90 a barrel in New York. Traders are keeping an eye on the nuclear talks taking place in Iran, which may result in an increase in supplies.

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