Rally Hopes Crumble as Powell’s Rates Reality Hits Full Force (Yields UP, Stock Futures DOWN)

I remember appearing on Fox Business’ Varney and Company about The Federal Reserve. When Stuart Varney asked me what will happen when The Fed finally removes the monetary stimulus, I made an explosion gesture. Well, its starting to happen.

(Bloomberg) The rally that’s bolstered risk assets over the past month was just a blip in a bear market that’s likely to worsen from here.

That’s the view of investors who seem to be finally getting the message that a resolutely hawkish Federal Reserve and central bank peers are planning to raise interest-rates at all costs to combat the hottest inflation in a generation.

Monday’s trading give credence to that prospect: equities, developed and emerging-market currencies and even haven Treasuries tumbled as fund managers digested Fed Chair Jerome Powell’s stern message that rates would keep going up even if it spells pain for households and businesses everywhere. 

“The environment has changed,” said Kim Fournais, founder and chief executive of Saxo Bank A/S. “I just have a hard time seeing how this market, that is still trading close to all-time highs, can stay at those levels. There will be a period of great volatility.” 

Goldman Sachs Group Inc. pegs the dollar as the main beneficiary amid the market chaos, Westpac Banking Corp. warns of fresh yen pressure and BNP Paribas Wealth Management sees more losses for developing-nation assets.

Almost every equity benchmark tumbled in Asia trading Monday as the fallout from the Fed’s hawkish rhetoric ripped through markets. S&P 500 futures dropped as much as 1.3%, indicating that US stocks are poised to extend a rout that saw the index erase $1.2 trillion on Friday.  

Yields on two-year Treasuries jumped to the highest since 2007 as traders ratcheted up rate hike bets, while the yen hurtled toward the closely-watched 140 level. The risk-sensitive Korean won led losses among emerging peers, tumbling to a 13-year low

Oddly, the Fed Funds Futures market wasn’t rattled by Powell’s announcement at Jackson Hole. The Fed’s target rate is 2.50% and is expected to rise to 3.863% by March then cool-off. The Cleveland Fed’s Mester said 4% then keeping it at 4% for an extended period of time.

But it is in Europe where Lagarde and company where the REAL action was. The ECB’s target rate is at 0% with a negative effective rate of -0.08%. But the ECB is expected to keep raising their target rate to 2.136% by July 2023.

Sovereign yields are rising across the board. Except for jolly old England.

Global equity futures are down across the board as well. But not like Friday’s plunge.