Investors could not stay away from the massive attack of the Western media, where the main topic is still the geopolitical conflict around Ukraine. The promotion of this topic is beginning to influence the markets' sentiment, forming an uncertainty factor.
At the same time, the internal political problems of J. Biden and his "Democratic Party" continue to drag the global financial markets, which are already in bad shape due to the expectation of a more vigorous start of the process of raising interest rates by the Fed. This is primarily a political struggle for Congress, the elections to which will be held this autumn. The "Democrats" need a war to happen in Ukraine to break into Congress on this wave. And the financial markets, which are already overstrained by the topic of COVID-19 and the impending start of Fed interest rate hikes, have become victims of this policy. Altogether, this produces an uncertainty factor, which manifests itself in sharp movements in stock indices, the US dollar exchange rate in the currency market, and the value of commodity assets.
Yesterday, all of the investors' attention was focused again on the geopolitical tension happening in Ukraine, and against this background, the speech of the head of the St. Louis Federal Reserve, Bullard, sounded faintly in the business media. He announced the need to raise interest rates to a full percentage point by July.
"We are at greater risk now than ever. This (the economic situation) may get out of control," he said during a panel discussion at Columbia University.
He calls on the Fed to raise interest rates even more aggressively. It can be recalled that Fed Chairman J. Powell said in January that the Central Bank may raise interest rates this year four times against the promised three in December. Following Bullard's logic, the regulator should make two rate hikes in the first half of the year – raise by 0.50% in March, and then raise again at the June meeting by the same amount. And if interest rates rise at such a pace, then the key rate will have to rise to 2.0% by the end of this year. Interest rates were at this level at the end of 2019.
The dynamics of futures on federal funds rates is interesting. They already show a 33% probability of a rate hike in March to 0.75%, and not to 0.50%. This indicates that some market participants believe that the rate in March may be raised not by the previously assumed 0.50%, but immediately by 0.75%.
How will the markets react if rates are indeed raised by 0.75% on March 16?
We believe that this can become a strong supporting factor for the continuation of the sale of treasuries and a strong increase in their profitability. On this wave, we can expect a local shock to the US stock market and a sharp rise in the dollar exchange rate in the currency markets. Commodity assets are also highly likely to be under pressure.
Regarding the prospects for next week, we believe that high volatility in the markets will continue in all markets. The news feed will be dominated by the expectations of the Fed's rate hike.
Forecast of the day:
Spot gold may make a downward correction amid positive dynamics in the stock markets, as indicated by the positive movement of futures for stock indices both in Europe and in America. But before a new attempt to rise to 1915.00, the price may fall to the level of 1878.00
The AUD/USD pair may receive support amid local demand for risky assets and rise to the level of 0.7275 if it breaks through the level of 0.7220.