Over the previous week, fears of a hawkish Fed following a 50 points interest rate hike weighed on global markets. Long-dated Treasury yields have spiked to their highest level since 2018, the US dollar index hit its highest level in two decades, while tech stocks are off to their worst start ever to a year. In parallel, gold prices fell for the third straight week, as an elevated dollar pressured demand for greenback-priced bullion, with rising U.S. Treasury yields further weighing on prices. On another hand, OPEC+ agreed on Thursday to another small production increase for June, amid persistent concerns over weaker Chinese demand and shortly after EU outlined proposals for new sanctions against Russian crude.
The yield on the benchmark 10-year Treasury note rose 6 basis points to 3.146% on Friday, its highest level since 2018, while the yield on the 30-year Treasury bond rose about 6 basis points to 3.221%. In fact, this came a day after the Fed announced a 50-basis-point interest rate hike. Yields dipped initially following the decision on Wednesday afternoon, with stock markets seeing a relief rally after Fed Chairman Jerome Powell said a more aggressive 75-basis-point hike was not on the cards. Along with the move higher in rates, the central bank indicated it will begin reducing asset holdings on its US$ 9 trillion balance sheet, starting June 1. As such, investors were heavily selling out of Treasuries between Thursday and Friday, seeing yields jump, as they remained concerned that a slowdown in economic growth could be a consequence of the Fed’s hawkish tightening of monetary policy.
Employment Data
In addition, weaker labor market data released on Thursday is also likely to have added to concerns. Worker productivity fell to start 2022 at its fastest pace in nearly 75 years while labor costs soared as the U.S. struggled with surging COVID cases, the Bureau of Labor Statistics reported Thursday. In fact, nonfarm productivity, a measure of output against hours worked, declined by 7.5% from January through March, the biggest fall since the third quarter of 1947. At the same time, unit labor costs soared 11.6%, bringing the increase over the past four quarters to 7.2%, the biggest gain since the third quarter of 1982.
In parallel, the US dollar index, which tracks the currency against six rivals, edged higher on Friday, to touch 103.94 in the previous session for the first time in two decades. The greenback added 0.22% to 130.46 yen, gaining 0.46% on the week, and taking it closer to last week’s 20-year top of 131.25. The euro slipped 0.11% to $1.053 on Friday. Sterling edged lower to $1.235, tumbling by 2.22%, the most in two years after the Bank of England warned of the risk of recession as it raised interest rates by half a percentage point.
Asian shares tumbled on Friday as the market fears that the U.S. Federal Reserve and some other major central banks will have to raise interest rates even more aggressively than planned to combat red-hot inflation, potentially pushing economies into a recession. MSCI’s broadest index of Asia-Pacific shares outside Japan shed 2.3% on Friday morning and is down 3.5% from last Friday’s close. On Wall Street, the Dow Jones Industrial Average and the S&P 500 both fell more than 3%, and the Nasdaq Composite shed by 5.0% in its biggest single-day plunge since June 2020 to close at its lowest level since November 2020.
Oil prices rise as EU nears Russia ban amid persisting supply concerns
Oil prices climbed for a third straight session on Friday, to $112.8 per barrel, while U.S. West Texas Intermediate (WTI) crude advanced to $110.2 per barrel, as looming European Union sanctions on Russian oil raised the prospect of tighter supply, offsetting concerns about global economic growth. In fact, the EU’s proposal is to phase out supplies of Russian crude oil in six months and refined products by the end of 2022, and it would also ban all shipping and insurance services for transporting Russian oil. On the supply side, the Organization of the Petroleum Exporting Countries, Russia, and allied producers, known as OPEC+, agreed as expected to another modest monthly increase in oil output. Ignoring calls from Western nations to hike output more, OPEC+ agreed to raise June production by 432,000 barrels per day, in line with its plan to unwind curbs made when the pandemic hammered demand.
It is worth mentioning that oil prices fell by more than 2% on Tuesday as demand worries stemming from China’s prolonged COVID-19 lockdowns outweighed the prospect of a European embargo on Russian crude. Beijing is mass-testing residents to avert a lockdown similar to Shanghai’s over the past month. The capital’s restaurants were closed for dining in while some apartment blocks were sealed shut.
Gold prices dropped for the third week
Gold prices edged lower on Friday, on track for a third straight weekly loss as the U.S. dollar and Treasury yields rallied on a hawkish U.S. Federal Reserve stance. Spot gold fell to $1,869 per ounce, while U.S. gold futures slipped to $1,869. SPDR Gold Trust, the world’s largest gold-backed exchange-traded fund, said its holdings fell 0.4% on Thursday. In other metals, spot silver slipped to $22.25 per ounce, platinum declined by 2.9% to $952.7 and palladium fell by 0.6% to $2,174.6. Rising U.S. interest rates increase the opportunity cost of holding non-yielding gold, while also boosting the US dollar, in which it is priced. The greenback is also seen as a rival safe-haven asset to gold during economic and political crises.
In parallel, Bitcoin dropped the most in almost a month following the Federal Reserve’s meeting. The largest digital currency fell to below $36,000, from $40,000 on Wednesday, the biggest intraday drop since April 11. Ether slumped as much as 7.2%. Avalanche and Solana were down as much as 11% and 7.3%, respectively. In fact, higher interest rates cause a ripple effect that will cause an increase in mortgage, car loan, and credit card rates, which will incentivize users to save more money and slow down on spending. As such, it comes as no surprise that we’re seeing people withdraw their money from the stock market and cryptocurrency markets, causing the current bearish correction.
