The firmness of central banks panics the markets

After a fine summer, the mood is once again gloomy on the financial markets. The stock markets are sinking into the red at the start of the week. Paris lost 0.83% after having already dropped 1.68% on Friday.

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The markets are undermined by the uncompromising speech made Friday by the Chairman of the Fed at the end of the annual symposium of central banks in Jackson Hole. Jerome Powell has hammered home his determination to fight inflation, even if it means further weakening the already shaky global economy. In the aftermath, the Dow Jones plunged 3.03%, recording its worst session since mid-May. Lee Nasdaq, rich in highly interest-rate sensitive technology stocks, meanwhile plunged 3.94% on Friday, and the S&P 500, the benchmark for professionals, fell 3.37%.

Inflation priority of central banks

This summer investors were hoping for a pause in the Fed’s rate hike campaign, counting on the peak in inflation being exceeded in the United States. In a few minutes these hopes were showered. In a short speech “of rare clarity and coldness” and “which will mark a milestone”, Jerome Powell confirmed that the American central bank would “vigorously use its tools” to curb inflation, according to John Plassard, strategist at Mirabaud . This will lead to “a long period of weaker growth”, acknowledged the boss of the powerful Fed. But, according to him, giving it up would be even more damaging for the economy.

Faced with the threat of inflation, central banks are standing up. Thus, Isabel Schnabel, the representative of the European Central Bank at the symposium in Jackson Hole (Wyoming), also held a firm speech on the fight against inflation. She said central banks had to act “even at the risk of weaker growth and higher unemployment”.

Under the action of central banks, rates should rise further in the coming months. However, rising rates are generally very bad news for equity markets. It increases the cost of debt for companies and can ultimately weigh on investments. It also tends to move sums invested in equities towards bonds, which become more attractive.

Rise of the dollar

On the debt market, the interest rate for the US 2-year loan, the most sensitive to the Fed’s short-term policy, rose at the start of the session to almost 3, 5%, a peak not seen since 2007. Driven by this rise in rates and carried by its status as a safe haven on the foreign exchange market, the dollar was also gaining ground. Thus, the euro evolved clearly below parity (-0.34% to 0.9933 dollar for one euro).

Assets considered the riskiest or most speculative, such as bitcoin, were struggling: the cryptocurrency lost more than 8% in two days and fell back below $20,000 for the first time since mid-July.