Global Financial Markets in Brief- Week of March 14
As per the weekly report released by the Arab Federation of Capital Markets (AFCM), over the previous week, the Federal Reserve approved on Wednesday its first interest rate increase in more than three years, to address spiraling inflation after keeping its benchmark interest rate anchored near zero since the beginning of the COVID pandemic.
The policymaking Federal Open Market Committee said it will raise rates by a quarter percentage point, or 25 basis points, and sees six more ahead. In parallel, oil prices re-jumped on Thursday after Russia-Ukraine talks appeared to yield no sign of progress, and markets continued to fret over tight supply, sparking a call by the International Energy Agency to reduce oil demand. Spiking commodity prices are on track to see their sharpest rises since 1970, sending a shock wave of suffering across the world as the prices of essential goods every human needs to survive are surging upwards, as per Dr. Fadi Kanso, the head of research at AFCM.
US Federal Reserve raises interest rates for first time since 2018
The Federal Reserve has raised interest rates for the first time since 2018, as the central bank struggles with soaring US inflation, the impact of the war in Ukraine, and the coronavirus crisis. The Fed raised rates by a quarter percentage point from near zero, in what is expected to be the first in a series of raises in the coming months. In fact, the Fed is projecting six more rate rises this year, while raising rates too quickly threatens to push the US into recession. Over the week, CNBC’s Fed Survey, which gauges the opinions of fund managers, strategists, and economists, put the probability of recession in the US at 33% in the next 12 months, up 10 percentage points from the 1 February survey. The latest survey put the chance of a recession in Europe at 50%.
US Dollar down
In parallel, the US dollar headed for its first down week in six versus major peers on Friday, languishing near a one-week low, as investors continued to assess the impact of the start of the Federal Reserve’s rate tightening cycle this week. The safe-haven greenback also lost traction – while the euro benefited – as traders stayed optimistic for an end to the war in Ukraine as talks continued between Moscow and Kyiv, although progress on Thursday was elusive. Sentiment also improved after Russia avoided default on dollar-denominated debt, with two payments totaling $117 million due on Wednesday.
Treasury yields up
On another note, the 10-year Treasury yield popped to its highest level in three years at one point Wednesday, after the Federal Reserve announced an interest rate hike. The yield on the benchmark 10-year Treasury note jumped 8 basis points to 2.24%, the highest level since 2019, while the yield on the 30-year Treasury bond fell 5 basis points to 2.444%. In economic data, consumers continued to spend in February through at a slower pace than expected, according to a Commerce Department report Wednesday. Advance retail sales grew 0.3% for the month, slightly below the 0.4% Dow Jones estimate.
The yen remained near a six-year low after the Bank of Japan left its ultra-accommodative policy settings unchanged on Friday, as widely expected, leaving it an outlier among developed-world central banks which are exiting pandemic emergency measures. Meanwhile, the continuation of peace talks even as fighting still rages in Ukraine has seen demand for safe havens like the dollar dry up, while the euro has rebounded from last week’s nearly two-year trough, on track for its first weekly gain since the start of last month. The single currency was slightly weaker at $1.108 on Friday, but up 1.6% for the week, its first winning week in six.
Oil jumps on lack of progress in Russia-Ukraine talks
Oil prices extended their rally on Friday at the end of a third volatile week of trade as there was slim progress in peace talks between Russia and Ukraine, raising the specter of tighter sanctions and prolonged disruption to oil supply, after a speech by Russian President Vladimir Putin added to market jitters about an extended conflict. Brent crude futures jumped to $109.1 a barrel after surging nearly 9% on Thursday in the largest percentage gain since mid-2020. U.S. West Texas Intermediate (WTI) crude futures climbed to $105.7 a barrel, adding to an 8% jump on Thursday.
It is worth mentioning that oil prices have dropped on Tuesday from 14-year highs that hit nearly two weeks ago. Oil registered heavy losses Tuesday, building on Monday’s decline, as myriad factors weighed on sentiment, including talks between Russia and Ukraine, a potential slowdown in Chinese demand, and unwinding of trades ahead of the Federal Reserve’s expected rate hike on Wednesday. Both West Texas Intermediate crude, the U.S. oil benchmark, and global benchmark Brent crude settled below US$ 100 per barrel on Tuesday, a far cry from the more than $130 they fetched just over a week ago. WTI ended the day at $96.4, for a loss of 6.4%. During the session, it traded as low as $93.5. Brent settled 6.5% lower at $99.9 per barrel, after trading as low as $97.4.
Gold prices set for biggest weekly drop since late November
Gold prices eased on Wednesday, as U.S. Treasury yields firmed near multi-month peaks ahead of an expected rate hike by the U.S. Federal Reserve, while investors focused on peace talks between Russia and Ukraine. The precious metal is highly sensitive to rising U.S. interest rates, which increases the opportunity cost of holding non-yielding bullion. Spot gold was down to $1,916.4 per ounce, after touching its lowest since March 1 at $1,906 on Tuesday. Palladium rose by 2.7% to $2,576.8 per ounce but was on course for a second consecutive weekly fall of about 8%. Spot silver was down by 0.3% to $25.3 per ounce and set for its first weekly dip in seven. Platinum was flat at $1,021.6 but was set for a weekly dip of 5%, the biggest since November.
In parallel, Bitcoin (BTC) managed to reverse its losses mid-week and gained 7% last week as the interest rate hike by US Federal Reserve has had a minimal effect on the market. BTC is currently trading near $41,700 with Ethereum (ETH) inching towards $3,000 with a 14% weekly gain. The breakout story of the week belongs to ApeCoin (APE), the token that powers the APE NFT ecosystem. The newly launched token is already amongst the top 40 cryptocurrencies by market cap after high volumes of trade in its first week. It is worth mentioning that the crypto market has gone past a $1.8 trillion market cap for the third time this March.